Lehr, W. “Economic Case for Dedicated Unlicensed”
Spectrum Series Working Paper #9
July 2004
Dedicated Lower-Frequency Unlicensed Spectrum
THE ECONOMIC CASE FOR DEDICATED UNLICENSED
SPECTRUM BELOW 3GHZ
By William Lehr*
Abstract1
There is general agreement that traditional mechanisms for managing
radio frequency (RF) spectrum are inefficient and in need of significant
reform. Many, if not most, of the economists who have considered the
issue appear to concur with the view that increased reliance on market
forces would enhance efficiency, and support assigning spectrum via
transferable, flexible licenses, especially when spectrum is perceived to be
scarce. The FCC’s Spectrum Policy Task Force (SPTF) has endorsed this
perspective, advocating only limited use of dedicated unlicensed for lower
frequency spectrum (below 3GHz).2 Unfortunately, the economic case for
additional dedicated unlicensed spectrum in lower frequency bands has
not been adequately stated. The goal of this paper is to redress this
deficiency and lend economic support to the case that has already been
made by an active minority of knowledgeable legal and technical experts
in support of the unlicensed model.3
This paper explains the economic arguments in favor of allocating
additional dedicated unlicensed spectrum in the lower frequency bands
below 3GHz.4
*
William Lehr is the associate director of the Research Program on Internet & Telecoms Convergence
(ITC, http://itc.mit.edu/) at the Massachusetts Institute of Technology.
Lehr, W. “Economic Case for Dedicated Unlicensed”
Table of Contents
I.
Executive Summary .............................................................................................. 3
II.
Introduction........................................................................................................... 7
III.
Why the interest in unlicensed spectrum?.......................................................... 8
IV.
Why is lower frequency spectrum special? ...................................................... 11
V.
What’s the real difference between licensed and unlicensed spectrum? ....... 13
A.
Dedicated unlicensed is consistent with liberalized, flexible licensing ................ 13
B.
Unlicensed does not mean free access.................................................................. 15
C.
Dedicated unlicensed is consistent with spectrum auctions. ................................ 17
D.
Dedicated unlicensed is different from underlay or overlay rights ...................... 18
VI.
A.
Economic arguments in favor of unlicensed..................................................... 20
1.
2.
3.
4.
5.
Economic basis for supporting exclusive licenses ................................................ 20
Scarcity may be a regulatory artifact ................................................................ 21
Coordination costs may be lower with unlicensed ........................................... 22
Exclusive licenses are not essential to support market allocation of spectrum 24
Exclusive licenses are not necessary to promote investment incentives .......... 25
Exclusive licenses not necessary to manage interference................................. 28
B.
Dedicated unlicensed below 3GHz preserves regulatory diversity ...................... 29
C.
Dedicated unlicensed supports innovation and investment .................................. 29
V11.
Conclusions and Policy Recommendations ...................................................... 31
Bibliographic References................................................................................................ 33
Endnotes........................................................................................................................... 38
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Lehr, W. “Economic Case for Dedicated Unlicensed”
I.
Executive Summary
Wireless services, especially wireless broadband, are critical to the evolution of our
communications infrastructure, and consequently to the health of our economy. Wireless
connectivity in our homes and offices is allowing us to access media, communications,
and computer resources and services more flexibly and it is supporting the evolution of a
diverse array of “follow-me anywhere, available everywhere, always connected”
functionality. Wireless is creating opportunities for wholly new services (e.g., distributed
sensor nets, location-based services, and mobile multimedia); it is enhancing the usability
and lowering the costs associated with traditional computing and communications
services (e.g., wireless drops to connect neighborhood fiber to homes); and wireless is
providing new platforms for competitive entry and new options for extending service to
previously under-served communities (e.g., WISPs in rural communities).
While “wireless services” encompass an incredible diversity of uses, technologies, and
markets, one commonality is that all depend on access to the radio frequency (RF)
spectrum. The traditional model for managing spectrum for commercial use has been
based on a licensing regime that grants licensees limited and restrictive-use rights to a
specific frequency band in a geographic area. Communication service providers,
equipment makers, end-users, and most policy-makers and industry analysts agree that
this regime – predicated on hundred year-old radio technology – is responsible for
substantial “artificial” spectrum scarcity and is badly in need of reform.
The scarcity is “artificial” because it could be significantly alleviated if regulatory
reforms were adopted to make it easier to reallocate spectrum to more efficient higher
value uses, and to encourage adoption of new spectrally-efficient wireless technologies.
Over time, technology has evolved in ways that make it possible to build much more
efficient and dynamically-responsive (intelligent) radio systems that can allow many
users and uses to simultaneously share the same frequency bands. Technologies like
smart antennas, spread spectrum modulation, and cognitive (software) radios are making
it feasible for transceivers to dynamically change their frequency, modulation, or power
levels to enable more efficient and intelligent spectrum sharing. The traditional logic that
exclusive frequency licenses are needed to manage “interference,” has been significantly
undermined by technical progress and the evolution of wireless markets.
Economists who have considered the problem, generally agree that efficiency would be
enhanced if market forces could play a greater role in allocating spectrum and
determining how spectrum is used. While eliminating inefficient license restrictions and
facilitating the emergence of secondary-markets for spectrum represent important
directions for reform, recommendations for such reforms are generally associated with
continued reliance on a regime based on exclusive-use licenses to specific frequency
bands. These licenses would be associated with tradable property rights to use the
spectrum in order to facilitate the emergence of secondary markets. While the licensing
model remains important, it is not the only model for managing spectrum.
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Lehr, W. “Economic Case for Dedicated Unlicensed”
This paper explains why allocating additional spectrum for dedicated unlicensed use is
also important and desirable – not as a substitute for, but in conjunction with
transitioning traditional licensed spectrum towards flexible use licensed spectrum.
Additionally, this paper explains why it is critical that such spectrum be allocated in the
lower frequency bands below 3GHz. While providing for unlicensed use in higher
frequency bands5 and via secondary use easements (either underlay or overlay rights)6 is
also desirable, these alternatives do not offer a valid substitute for dedicated unlicensed
spectrum in the lower frequency bands. Indeed, as the paper explains, support for
unlicensed that focuses solely on secondary easements may delay progress towards
spectrum reform and, contrary to their avowed purpose, slow a movement towards
increased reliance on market forces for managing how spectrum is used.
Support for further expansion of the licensed regime at the expense of the dedicated
unlicensed model rests on a number of misconceptions. These include the incorrect belief
that support for the unlicensed model is inconsistent with support for flexible licensing
and secondary markets, with deregulation, or with support for increased reliance on
market forces. As I explain in the paper, this is simply not true. Unlicensed spectrum can
enhance prospects for effective deregulation, improving the likelihood that secondary
markets will operate efficiently and regulatory impediments that have given rise to
artificial spectrum scarcity will be reduced. Market processes can be used to select and
implement whatever interference management strategy is desired.
Another common misconception is that unlicensed spectrum must be free and is
inconsistent with auctions. This is also untrue. To the extent there are real costs
associated with sharing spectrum (e.g., congestion costs arising from real spectrum
scarcity)7 or with implementing spectrum reform (e.g., relocating incumbents)8, these
costs cannot be eliminated by adoption of the unlicensed model. While allocating
additional spectrum to unlicensed is consistent with auctions, there is an expectation that
auctions will not be used to extract rents from the wireless industry as a whole and that
the impact of spectrum reform will reduce substantially the rents due to artificial
spectrum scarcity.9 To date, this “artificial” scarcity has resulted in very high marginal
prices being paid for spectrum in auctions since the mid-1990s, and substantially higher
prices for licenses for lower-frequency spectrum (order of magnitude on a dollar bid per
MHz per population served). Unlicensed spectrum will provide a low-cost access option
for new and low-willingness-to-pay technologies and uses that might otherwise be
missing if exclusive reliance is placed on the licensed spectrum model. While we cannot
predict precisely what such applications might be, an important element of spectrum
reform is to move towards a regime that does not bias outcomes because of the choice of
a regulatory model.
A third misconception is that the unlicensed model only makes sense if one believes that
all spectrum scarcity is artificial, and that technology can completely resolve any current
or future congestion issues. This is also untrue. Of course, if spectrum really is not scarce
(i.e., the technologies are as good as some engineers believe they might be), then the
unlicensed model is obviously superior; and, importantly, adoption of the unlicensed
model provides protection against a licensee exploiting her right to exclude shared users
to capture artificial scarcity rents. Economists, however, are understandably skeptical
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Lehr, W. “Economic Case for Dedicated Unlicensed”
that scarcity will disappear, but this does not mean that property rights and exclusive
licenses offer the best mechanism under all circumstances for addressing the congestion
issue nor does it mean that market-based allocation processes are inconsistent with
unlicensed spectrum. When spectrum is indeed scarce, there are a wide variety of
mechanisms that can be employed to efficiently allocate unlicensed spectrum. These
include social norms and technical access protocols that can effectively address any
“tragedy of the commons” that might arise. Just as we appropriately do not see markets
based on tradable property rights being used to allocate every scarce resource in society,
so we should not expect to see all spectrum allocated via license trading.10
Licensed spectrum is also not necessary to provide appropriate incentives to invest in
infrastructure. Historically, exclusive licenses were justified as necessary to provide
service providers with protection against future interference in order to induce the service
providers to undertake sunk investments in long-lived infrastructure. In light of advances
in computing and communications technology, the infrastructure investments and the
underlying spectrum have become much less co-specialized, thereby undermining this
traditional justification for licensing. At the same time, the rapid pace of innovation and
technical uncertainty implies that licenses pose a risk of future expropriation of system
value to entrepreneurs and developers of new technologies. As with overly broad
intellectual property rules, exclusive licenses can allow a licensee to use artificial scarcity
to extract the surplus associated with a new technology. The threat of such ex post
expropriation deters ex ante investment in developing the innovations.
The unlicensed model also offers several important benefits, which may be especially
valuable if used in conjunction with a regime based on flexible exclusive use licenses.
First, it may promote investment and innovation in wireless services. Second, it can
facilitate the emergence of new business models for offering wireless services. These
include provisioning of end-user-owned and ad hoc networks. During the
commercialization of the Internet, it was noted that most of the Internet-specific capital
investment in the network was under the control of end-users and that this helped fuel the
growth of the network. Similarly, wireless technologies can support increased reliance on
edge-based infrastructure which can both substitute for and complement investments in
the core of the network.11
Third, using both a dedicated unlicensed model and a licensed model for managing lower
frequency spectrum will reduce regulatory distortions. Neither approach is or can be
completely free of distortions. Providing for both leaves it to market participants to
choose where best to locate services. The unlicensed option is likely to be especially
valuable for emerging technologies. This regulatory diversity helps future-proof policy
against unforeseen developments in technology or wireless services.
Allocating additional spectrum for dedicated unlicensed use may offer the best strategy
for achieving meaningful and timely reform that provides increased opportunities for
both licensed and unlicensed use. The allocation of additional dedicated unlicensed
spectrum will help defuse opposition to flexible licensing and may be more likely to gain
support than an attempt to pass secondary use easements. In any case, attempting to
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Lehr, W. “Economic Case for Dedicated Unlicensed”
recoup any windfall gains via auctions that suck additional capital out of the sector is
contrary to the goal of promoting increased investment in next generation infrastructure.
In promoting the transition to wireless broadband, there a number of proceedings wherein
the FCC can promote expanded access to dedicated unlicensed and improve spectrum
management. The upcoming DTV transition and the MMDS spectrum proceedings both
provide potential opportunities for expanding the dedicated spectrum available for
unlicensed use. Additionally, the cognitive radio proceeding is important to promote this
key enabling technology.
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Lehr, W. “Economic Case for Dedicated Unlicensed”
II.
Introduction
The expansion in wireless services is one of the most important trends that has
transformed the Information, Communications and Technology (ICT) sector during the
last decade. Mobile telephone services changed from being a premium service for the
elite, used mostly from cars, to a mass market communication service that can be used
anywhere. Over the same period, the growth of the Web, email, and the Internet brought
data communication services to the mass market for the first time. Now, with the
emergence of wireless broadband data services, the two worlds are converging. This
convergence will help drive another cycle of investment, innovation, and economic
growth.
Wireless enables mobile computing and ubiquitous connectivity, thereby improving old
services and creating opportunities for new ones. Progress in sensor networks,
information technology in biotech, multimedia integration, and “GPS” location-based
services all depend on wireless technology. Wireless also offers one of the best hopes for
increased competition for wireline services. Direct broadcast satellite and new digital
terrestrial broadcasting compete with coaxial-cable TV, while mobile telephony and
wireless local loops (WLL) compete with fixed line telephony. Continued growth and
innovation in wireless services is critical to the health of the ICT sector, and hence, to the
overall economy.
While “wireless services” encompass an incredible diversity of uses, technologies, and
markets, one commonality is that they all depend on access to the radio frequency (RF)
spectrum. The traditional model for managing spectrum for commercial use has been
based on a licensing regime that grants licensees limited and restrictive-use rights to a
specific frequency band in a geographic area.12 Historically, the license regime imposed
restrictions on the services that could be offered, the technologies that should be used,
and the transferability of license rights.13 In light of advances in wireless technology and
the evolution of markets for wireless services, consensus is emerging that the traditional
model for managing spectrum is grossly inefficient.14 It has impeded innovation and
investment in new technologies. The regulatory restrictions have artificially constrained
opportunities to redeploy spectrum to higher value uses, to offer new services, and to
adopt technologies that would utilize spectrum more intensively. The net effect has been
to accentuate a perception of acute spectrum scarcity. The question is not whether
spectrum management is in need of reform, but rather how it should be reformed.
Much of the focus has been on increasing the economic role of market forces in
regulating how spectrum is allocated and used. There has been increased pressure to
liberalize licenses and facilitate the emergence of secondary-markets for spectrum.15
While this represents an important direction for reform, it is generally associated with
continued reliance on a regime based on exclusive-use licenses to specific frequency
bands. While the licensing model remains important, it is not the only model for
managing spectrum.
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Lehr, W. “Economic Case for Dedicated Unlicensed”
This paper makes the economic case for allocating additional lower-frequency spectrum
for dedicated “unlicensed” use (below 3GHz). The market success of services operating
in current allocations of dedicated unlicensed spectrum, the potential for unlicensed
spectrum to support new and innovative technology and business models, and the need to
“future-proof” regulatory policy make it desirable to allocate additional spectrum for
unlicensed uses.
The rest of this paper is organized into five sections. Section II explains why there is
renewed interest in the unlicensed model, and Section III explains why spectrum below
3GHz is special. Section IV clarifies what is essential about the “unlicensed” model and
addresses several potential misconceptions that may confuse how it differs from the
licensed approach. Section V focuses on the arguments in favor of relying on a regime of
exclusive licenses instead of unlicensed use for lower-frequency spectrum, and explains
why an additional allocation for unlicensed use would be beneficial. Section VI
concludes.
III.
Why the interest in unlicensed spectrum?
Traditional spectrum management based on exclusive licenses to narrow frequency bands
has been justified, in part, on the basis of hundred-year-old radio receiver technology.16
Early receivers were limited in their ability to tune and separate desired signals from
background noise, which includes signals from other transmitters. The exclusive licenses
granted the licensee the right to deny use of the spectrum to other transmitters operating
in that frequency band.17 This was intended to protect the licensee’s service from
interference, but it also allowed the licensee to exclude shared use even in situations
where such use would not interfere.18
Over time, technology has evolved in ways that make it possible to build much more
efficient and dynamically-responsive (intelligent) radio systems that can allow many
users and uses to simultaneously share the same frequency bands. Technologies like
smart antennas, spread spectrum modulation, and cognitive (software) radios19 make it
feasible for transceivers to dynamically change their frequency, modulation, or power
levels to enable more efficient and intelligent spectrum sharing.20 The traditional logic
that exclusive frequency licenses are needed to manage “interference,” has been
significantly undermined by technical progress and the evolution of wireless markets. For
example, advances in signal processing technology (e.g., multi-user detection theory) and
cooperative networking (e.g., ad hoc networks or grid computing) can exploit the fact that
there are multiple signal sources sharing the same frequency bands to improve reception
gain.21
The increased interest in the unlicensed model has been prompted, in part, by the
dramatic growth associated with wireless Local Area Networks (WLAN).22 For example,
the rapid growth of WiFi – a WLAN technology – demonstrates the important role that
unlicensed can play in the evolution of wireless services.23 WiFi services operate in the
2.4GHz unlicensed band that is shared with cordless phones, microwave ovens, and a
variety of other uses.
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Lehr, W. “Economic Case for Dedicated Unlicensed”
Considering the sad state of the ICT sector in recent years, it is especially noteworthy that
22.7 million WiFi units worth $1.7 billion were sold in 2003, reflecting three-digit
growth for each of the preceding two years.24 Although the reach of a WiFi base station is
limited to a few hundred feet, the proliferation of WiFi-based public “hot spots” in
government buildings, airports, hotels, coffee shops, and other public areas make it
increasingly possible to cyber-forage for a wireless broadband connection.25 According to
Gartner Dataquest, public “hot spots” are projected to grow tenfold from almost 15,000
in 2002 to over 152,000 by 2005.26 Pyramid Research predicts there will be 707 million
WiFi users generating $21 billion in service revenues worldwide by 2008.27 In addition,
many end-users are using WiFi to extend the reach of their fixed broadband service
throughout their homes thereby enhancing the usability of broadband Internet access and
providing opportunities for new types of consumer-grade networked appliances. In many
cases these home WLANs and sponsored hot sports are supporting open access to the
general public via “freenets.”28
In light of this remarkable growth, it is worth remembering that as recently as five years
ago, most analysts expected wireless broadband data access to be delivered by mobile
telephone service providers over their “3G” networks. Although 3G services are now
available in some markets, it has taken longer than expected, the coverage is more
limited, and the bandwidth slower than originally touted. Additionally, carriers have not
harmonized on a common “3G” standard and equipment prices remain high. While
mobile carriers will remain key participants in the broadband wireless world, they are no
longer the only player. Five years ago, WLANs and 3G services were viewed as
addressing very different market needs. Now, it is clear that these services can be both
complements and substitutes.29 Equipment makers and service providers are now busily
trying to integrate 3G and WiFi services.
Other technologies like WiMAX (802.16) are extending the capabilities of WLAN-like
technologies to cover metropolitan-sized areas, higher bandwidths, and better congestion
and security management capabilities in order to make them more suitable for adoption
by public communication service providers. These updated versions of “MMDS”-like
technologies may be used as a platform for delivering WLL access services. The use of
such technologies offers an alternative to and competing use for spectrum that might
otherwise be used by mobile telephony providers for their 3G (and after that, 4G)
services, or by over-the-air broadcasters to deliver interactive multimedia content. At the
same time, technologies like ultrawideband (UWB) are challenging the very basis for
managing frequency in the form of exclusive licenses. UWB applies spread-spectrum
techniques to enable high bandwidth transmissions to efficiently share a broad frequency
band without destructive interference. While current development efforts are focusing on
the use of UWB as a short-distance wireless-cable substitute (e.g., to provide wireless
connectivity for home entertainment systems),30 UWB also could be used to support
wide-area broadband communications.
The plethora of wireless technologies is giving rise to new models for deploying last-mile
infrastructure. Municipalities,31 Wireless ISPs (WISPs), and user-cooperatives32 are
taking advantage of WiFi and other of the new types of technologies from companies like
Alvarion and Tropos Networks to build out low-cost infrastructure to provide alternative
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Lehr, W. “Economic Case for Dedicated Unlicensed”
community-owned metro-area networks, mobile broadband for public safety, and
community “hot spots” to promote economic development and enhance access to
advanced communication services.
The future wireless world will consist of a heterogeneous mix of overlapping and
partially integrated wireless networks and technologies. Legacy technology will
continuously mix with a continuous stream of new technology.33 Short-range networks
will mix with longer-range networks. There will be networks limited to an individual’s
personal space (WPANs), networks that reach tens to hundreds of feet in a home or office
(WLANs), and networks that extend tens of miles (WMANs). Some will consist of one or
only a few base stations, while others will integrate many base stations providing service
over a wide-area. Some will provide mobile communication services at automobile
speeds, others at walking-speeds, and others only to specific fixed locations (e.g., WLL).
There will be networks that support data rates for traffic that is low speed (control,
sensors), intermediate speed (Web browsing, email, or telephony), and high speed (highresolution video or remote disk sharing). Sometimes these capabilities will be provided
over an integrated network and other times over separate networks that may or may not
communicate with each other. These may be owned by an end-user, a single service
provider, or require traffic to be handed-off across infrastructure owned by multiple endusers and service providers.34
The business cases for delivering these wireless capabilities to end-users will vary by
technology and application. For example, WPAN and WLAN technologies to
interconnect consumer appliances may be bundled and sold as consumer equipment.
Wider-area services based on 3G or 802.16 technologies may be deployed via a service
provider model. In the former case, it may seem more natural to rely on an unlicensed
model because the devices may be expected to be used more often in a non-coordinated,
standalone fashion (e.g., within a single home). Whereas a licensed model may seem
more natural to support a service-provider model used to provide wide-area
communication services over a wireless network involving many base stations covering a
large geographic area. In the case of a Bluetooth-enabled headset or MP3 player or a
UWB-enabled home entertainment hub, it is more likely that interference issues – if they
arise – can be locally managed (e.g., if a cordless phone is interfering with use of the
home WLAN, then walk a few feet away). In contrast, service providers may be reluctant
to invest the millions of dollars that are required to build a wide-area carrier network
without the protection against future interference that an exclusive license provides.
While the linkage between range of operation, equipment/service provider models, and
unlicensed/licensed spectrum is valid to a point, it is also overly simplistic. As the
competition between WiFi and 3G demonstrates, technologies thought to address one set
of needs may be used in another context, creating additional opportunities for
technologies to compete with and complement each other. The convergence of computing
and communications, which is pushed still further by the growth of wireless, makes it
more difficult to define where the network “edge” is and what functionality should be
included in equipment versus networks.35 At this stage, it is far from clear which
technologies will work best with which business and regulatory models to serve which
user needs. In all likelihood, there will be a mix of models and this is healthy.
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Lehr, W. “Economic Case for Dedicated Unlicensed”
The need for a mix of regulatory models has been recognized by policy-makers. For
example, the FCC’s Spectrum Policy Task Force concludes that “no single regulatory
model can or should be applied to all spectrum,” (page 4) however they also argue that in
the lower frequencies (below 5GHz), that the FCC “should focus primarily, though not
exclusively, on using the exclusive use model” (page 38).36 Before examining the
economic basis for the bias in favor of a licensing regime, it is important to understand
why spectrum below 3GHz is special and therefore needs to have additional spectrum
allocated to unlicensed in order to properly respect the Task Force’s worthwhile goal of
promoting diversity in the regulatory models employed.
IV.
Why is lower frequency spectrum special?
While technology is making it more feasible for spectrum at different frequencies to
support similar services (and hence act as substitutes), there are important differences in
the usefulness of spectrum at different frequencies. The chief technical advantage of
using lower-frequency spectrum is that lower-frequency signals propagate more easily
through the air and are more tolerant if there is not direct line-of-sight (LOS) between the
transmitter and receiver.37 Also, the electronics associated with operating at lower
frequencies are less expensive.38 Finally, there is simply much more spectrum available
in higher frequency bands.39
Moreover, because of its attractiveness for offering particular services (e.g., wide area
communication services),40 its limited abundance, and legacy technology issues,41 the
lower-frequency spectrum is much more crowded with incumbents than is higherfrequency spectrum. Over time, the frontier of usable RF spectrum has moved to ever
higher frequencies as improvements in digital technology have made it increasingly
viable to digitize and process higher frequency signals. These advances support viable
communications using lower power signals in noisier environments, with improved nonLOS performance, and over longer distances (e.g., smart antenna design) than was
previously possible. While this has made it feasible to locate services in higher frequency
bands than before – and thereby relaxed constraints on the supply of available spectrum –
demand for lower-frequency spectrum has also increased. The changes in technology
have not changed the physics of RF transmissions.
The technical “advantages” of lower-frequency spectrum depend on the intended
application. For example, the longer propagation performance may be undesirable if the
goal is to control interference by limiting the effective transmission distance. Thus, if
one’s goal is to interconnect entertainment system components within the home with
high-bandwidth (data rate) channels that do not extend outside the home (potentially
causing interference with other uses of the spectrum), using higher-frequency spectrum
may be preferable: the benefits of spectral abundance are not offset by reduced
propagation distance.
Alternatively, if one wants to go longer distances at high data rates then higher
frequencies may also have advantages. For example, it is easier to concentrate a high data
rate signal into a focused narrow beam at a higher frequency and this may also allow one
to operate at a higher power (e.g., microwave point-to-point services).42
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Lehr, W. “Economic Case for Dedicated Unlicensed”
The benefits of lower-frequency spectrum are most apparent if one’s goal is to support
two-way, narrowband, communications over a wider area (measured in miles instead of
hundreds of feet) where non-LOS operation is important. Classic applications here
include mobile telephony service (e.g., 2G/3G) and WLL (which includes MMDS and
802.16 technologies). On the one hand, the longer propagation characteristic means that
fewer cell sites may be used if the service is supported at a lower frequency. These
savings can be substantial. For example, Wanichkorn and Sirbu (2002) estimated the
costs of deploying modern fixed wireless local loop systems based on second-generation
MMDS technologies. They found that a system operating at 2.6GHz (current spectrum
for MMDS) would require twice as many cell sites as one operating at 700MHz (UHF),
which would result in system cost savings of 17%.43 Additionally, non-LOS operation
can enhance usability (e.g., a mobile phone works when in pocket or inside buildings)
and lower installation costs.44 Additionally, with the kind of antennas used in today’s
handheld devices, the signal will go farther at lower power at a lower frequency.45 This
can help conserve battery power which is important in its own right.
While the benefits of longer distance propagation, non-LOS, and potentially greater
power conservation are readily apparent for certain classes of applications (e.g., control
networks, short message data services, and voice communications), much of the interest
in new wireless services is focused on broadband applications. For such applications it
may be preferable to locate these in higher frequency channels, in any case. While true,
this is not an argument against additional dedicated unlicensed spectrum. Even if wide
area, narrowband communication services do end up dominating most of the spectrum
below 3GHz, this does not mean that the principal mode for managing such spectrum
should be via exclusive licensing.
In any case, today a substantial chunk of prime lower-frequency spectrum is currently
occupied by incumbent licensees that offer “broadband” services. Traditional over-the-air
radio and television broadcasting in the AM/FM and VHF/UHF bands use valuable
lower-frequency real estate for which alternative higher-frequency distribution media are
already available (e.g., coaxial cable television and direct broadcast satellites deliver
many more programming channels without using lower-frequency spectrum). Partially
relocating these services to higher frequency channels or conversion to more efficient
broadcast transmission technologies would free up additional commercial spectrum for
other uses that currently lack viable alternatives, including allocating additional spectrum
for dedicated unlicensed use.
Finally, the debate over unlicensed versus licensed is not as important at higher
frequencies precisely because spectrum is relatively more abundant. It can be allocated to
both licensed and unlicensed commercial uses. Moreover, because higher-frequency
signals travel more nearly in straight lines, an exclusive licensing regime could be based
on point-to-point licenses.46 Because the signals travel in a “pencil beam” (e.g., a wireless
fiber substitute), it is feasible to award a large number of non-interfering, exclusive
licenses in a small geographic area.47 If there are an infinite number of licenses available,
then the licensing regime is closer to an equipment certification regime, like, for example,
the Part 15 rules which govern operation in unlicensed spectrum today.48
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Lehr, W. “Economic Case for Dedicated Unlicensed”
This paper focuses on the need for spectrum reform to allocate additional dedicated
spectrum below 3GHz precisely because this spectrum is highly desirable and its
allocation is contentious. While the “scarcity” of spectrum is debatable, it is clear that
regulatory policy can make spectrum scarce when it might otherwise not be. Allocating
additional spectrum to dedicated unlicensed helps protect against artificial spectrum
scarcity arising from the choice of a regulatory model.
V.
What’s the real difference between licensed and unlicensed spectrum?
The preceding discussion explained why advances in wireless technology and markets
have increased pressure to reform spectrum management, and have increased interest in
the unlicensed model. It also explained why spectrum below 3GHz is special. Before
explaining the economic arguments in favor of allocating additional spectrum to
unlicensed, it is worthwhile dispelling some potential misconceptions regarding the
differences between the licensed and unlicensed management regimes.
A. Dedicated unlicensed is consistent with liberalized, flexible licensing
More spectrum for unlicensed does not mean less spectrum or less flexibility for licensed
uses. Importantly, more spectrum for dedicated unlicensed does not mean more
regulation.
The case made here is fully consistent with increased liberalization of spectrum policy
and with the arguments by economists that efficiency would be enhanced if non-marketbased restrictions on how licensed spectrum is used were relaxed.49 Policies which
facilitate the secondary trading of licenses will help direct spectrum to its highest value
uses and will relax artificial (regulatory-induced) spectrum scarcity. Barriers to entry for
new competitors, technologies, and services would be reduced. And, the opportunity cost
for accessing spectrum for new technologies would be reduced, while incumbent
technologies would be induced to properly account for the economic value of spectrum
used, or in the case of under-used spectrum that is already licensed, the costs of leaving
such spectrum fallow.
In making the case for additional dedicated unlicensed spectrum, this paper presumes that
the licensing regime will be reformed to eliminate inefficient regulatory constraints and
to increase the role of market forces in determining how spectrum is allocated and used.50
However, the case for allocating additional spectrum for dedicated unlicensed is even
stronger if progress towards creating secondary spectrum markets and for liberalizing
rules for the use of exclusive licensed spectrum is limited. Without such progress, the
transaction costs for accessing spectrum by new uses and technologies will remain
artificially high. (However, even with such progress, situations will remain where
transaction and coordination costs will remain lower for unlicensed, as will be discussed
further below.)
Allocating additional spectrum for dedicated unlicensed use need not mean less spectrum
for licensed uses.51 There is spectrum available to promote both regulatory models in the
highly desirable lower frequency bands. Allocating an additional 100 to 300MHz for
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dedicated unlicensed use below 3GHz would dramatically expand the available spectrum
for unlicensed use, while leaving exclusive licenses the dominant model for managing
commercial spectrum.52
Furthermore, it is worth noting that adopting a regime of dedicated unlicensed spectrum
does not imply more regulation than management under a liberalized license scheme.
First, if the spectrum is not congested, then even the minimal regulatory oversight of
issuing licenses can be avoided under an unlicensed regime. Complete deregulation
would be the extreme version of an unlicensed regime.
Second, if congestion does occur, some sort of regulatory mechanism to reconcile and
enforce conflicting claims will be needed regardless of whether the management regime
is unlicensed or licensed. Congestion management in unlicensed spectrum could be via
an access etiquette or protocol, through market pricing, or through some sort of
administrative oversight. The administrative oversight could be via the courts (e.g.,
potentially, a specially-constituted “spectrum court”53) or via a regulatory agency such as
the FCC, as is currently the case. Transferring administrative oversight from the FCC to
the courts may reduce the inefficiencies of regulatory oversight (e.g., political capture,
influence costs, bureaucratic red tape), but it will not eliminate these costs.54 More
importantly, these same enforcement/coordination options are available under a regime of
unlicensed spectrum, and do not require adoption of exclusive licensing for
implementation.
Although it may seem more natural to manage unlicensed spectrum through an access
etiquette, there is no reason why the government could not either manage a real-time
market, or outsource such management to a band manager for a fee. The band manager
does not have to have an exclusive license to be induced to manage the spectrum
efficiently.55 The creation of such a market does not necessitate exclusive licensing, as I
explain further below. Alternatively, if a protocol approach is used, this does not mean
that the FCC has to choose the protocol or retain a bureaucracy to enforce the protocol.
Its selection could be left to a private standards development organization (e.g., IEEE)
and enforcement could be via the courts. Finally, while it is beyond the scope of this
paper to make a specific recommendation regarding how dedicated unlicensed should be
managed, there are a number of proposals that might be considered, ranging from a
modified version of the Part 15 rule framework that is currently used to regulate use in
the ISM unlicensed band to some new set of “rules of the road” or a technical standard.56
Much of the support for exclusive licensing appears motivated by a desire to move
regulatory control away from the FCC and towards deregulated markets or the courts.57
However, as the previous discussion makes clear, these goals are not inconsistent with a
regime based on dedicated unlicensed spectrum. Moreover, prospects for realizing the
goal of further deregulation would likely be enhanced if additional spectrum were to be
allocated to dedicated unlicensed because this would help alleviate scarcity (reducing the
opportunity cost for spectrum) and would potentially decouple and thereby defuse some
of the current opposition to reform.
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Allocating additional spectrum for dedicated unlicensed may ease the transition to
spectrum reform in several ways. For example, some of the opposition to flexible licenses
is from those who prefer the unlicensed model. Allocating additional dedicated
unlicensed spectrum would help ameliorate their opposition. Other opposition to
liberalized licenses is from those who oppose granting a windfall to incumbent licensees.
Providing spectrum for dedicated unlicensed use would offset such a windfall by
providing a substitute for the licensed spectrum (which will lower windfall profits to the
extent that spectrum scarcity is reduced and provides a platform for competitive entry).
Additionally, the perceived “windfall” might be reduced if incumbent assistance in
making additional spectrum available for unlicensed were to be made part of the
“bargain” with incumbents by which they might gain additional license rights. On the
other side, much of the opposition to unlicensed comes from incumbents who fear
secondary easements threaten their license rights. Dedicated unlicensed in another
frequency band is less threatening than “in-band” unlicensed use via easements.
In summary, therefore, support for dedicated unlicensed does not mean more government
control, more regulation, or less flexible licensing. Indeed, additional lower frequency
spectrum for dedicated unlicensed could help ease the transition to more efficient
spectrum allocation mechanisms and enhance the efficiency of spectrum markets, while
limiting the potential of regulatory distortions.
B. Unlicensed does not mean free access
The debate over unlicensed is sometimes confused with questions of what price to charge
for spectrum. Implicit in the idea that spectrum ought to have a positive price is the
notion that there are costs associated with allocating, managing, and using spectrum.
Because the RF spectrum is not “destroyed” when it is used, there are no costs associated
with replenishing the resource.58 However, a positive opportunity or use cost may arise
when spectrum is scarce. The opportunity cost arises because spectrum that is used for
one purpose may preclude use by another. The scarcity may be real – in the sense that
two interfering uses may not be able to co-exist or share the spectrum at the same time –
or artificial – as when there exists a regulatory restriction (which includes an exclusive
license) that precludes another use even if such use could share the spectrum without
interfering.59 When multiple uses seek to share the same spectrum and there is
“interference” then we say that the spectrum is “congested.” Under such circumstances,
the user of the spectrum imposes a “congestion” externality on other actual or potential
users of the spectrum. This is a real cost of using spectrum that must be borne by society.
Furthermore, whether the spectrum is priced or not, these economic costs are incurred.
For example, they may be incurred in the form of reduced quality of service (i.e.,
increased delays, higher bit error rates, or denial of service).
Spectrum costs may also arise associated with the need to address legacy issues (e.g. to
clear spectrum from incumbents) or to cover spectrum management costs (e.g., the costs
of issuing and managing licenses or supporting a secondary spectrum market).
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Lehr, W. “Economic Case for Dedicated Unlicensed”
As long as there are costs associated with allocating, managing, or using spectrum,
unlicensed spectrum is no more “free” than is licensed spectrum.60 A key distinction over
licensed versus unlicensed spectrum is not whether spectrum is “free,” but rather how
spectrum use is priced and charged for. An example of the classic licensed model is
traditional mobile telephone service in which end-users make monthly payments to a
service provider that increase with usage.61 In contrast, the classic unlicensed model is of
an end-user who purchases a WiFi-enabled device and then can communicate as much as
she likes without paying any additional (future) fees for use of the service. In the WiFi
case, the unlicensed spectrum was made available by the government for no “charge.”
Prior to the advent of spectrum auctions, the government did not seek to collect money
for use of the spectrum.62
While these examples are clear, they are misleading because neither is necessarily bound
to a particular pricing or business model. For example, a communication service contract
could be offered over unlicensed spectrum (e.g., public “hot spot” vendors); or equipment
vendors could capitalize spectrum charges in the initial purchase price (e.g., the cost of
acquiring spectrum for dedicated unlicensed use could be recovered via fees on
equipment sales). Alternatively, equipment vendors can use leases and expected future
purchases to amortize up front costs; or a service provider can shift future recurring
charges to initial one-time charges.
The real distinction is not whether the licensee is a service provider or equipment
vendor,63 or whether costs are recovered via one-time charges or via recurring charges,
but whether there is a private entity (business) that has a right to extract revenue from
end-users as a condition for using the spectrum. The key distinguishing feature of
unlicensed spectrum is that there is no grant of such a right. In an exclusive license
regime, it is possible for the licensee to exclude other users for reasons beyond those
related to interference management. These could include the desire to artificially restrict
spectrum supply in order to extract scarcity rents or to protect or extend market power.
For example, AM and VHF broadcasters opposed the allocation of spectrum for FM and
UHF broadcasts because these promised to increase competition.64 In contrast, in an
unlicensed regime, the only restrictions against shared use arise as a consequence of the
need to limit interference.65
Because the decision to adopt an “unlicensed” regime cannot eliminate real costs when
they arise, it cannot make spectrum “free.” However, by eliminating charges that might
arise associated with artificial scarcity (arising from use of the exclusive use right), it
should reduce the costs of using spectrum. This also means that if there are any fees for
spectrum usage that these will not require prior negotiation of a contract with a service
provider (and avoidance of such costs eliminates at least one potentially important source
of transaction costs). Furthermore, to the extent unlicensed access bears a non-zero price,
it is expected that these will be small and will be associated solely with the need to
account for only real costs associated with spectrum usage (i.e., congestion costs or costs
associated with setting up and managing use of the unlicensed spectrum).66 Therefore,
there is an implicit assumption that access to spectrum under an unlicensed regime will
be nearly free to individual end-users.
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C. Dedicated unlicensed is consistent with spectrum auctions.
Whether spectrum should be auctioned, and if so, how auction proceeds should be
distributed is another issue that can confuse the debate over unlicensed spectrum. It is
tacitly assumed that for auctions to be effective in eliciting bidders true valuations, the
spectrum should be offered under exclusive use licenses. To really fit the theoretical
ideal, these licenses should be perpetual.67 Therefore, this would suggest that allocating
additional spectrum to dedicated unlicensed is inconsistent with auctions. This is
incorrect.
Over the last decade, spectrum auctions have provided a large source of funds for general
government revenues. Proponents argue that these auctions efficiently allocate spectrum
to its most efficient uses and provide a mechanism for the general public to benefit from
any scarcity rents associated with spectrum. Opponents argue that the auctions have
imposed a crippling debt burden on would-be providers and have siphoned off muchneeded critical investment capital from the telecommunications sector, thereby slowing
the roll-out of advanced services.68
While economists generally agree regarding the efficacy of auctions in assigning
spectrum to its highest value uses, this could also be accomplished via secondary trading
in exclusive licenses that may initially have been allocated by lottery.69 Moreover, if
secondary trading is not allowed, then auctions may fail to ensure that spectrum is
assigned optimally over time. That is, even if the ex ante assignment (based on the best
knowledge available to bidders at the time of the auction) is efficient, ex post changes in
technology or markets may make a different assignment more desirable. Therefore,
auctions are neither necessary nor sufficient to ensure that spectrum is efficiently
allocated.
Auctions are also attractive because they provide a vehicle for capturing and reallocating
any scarcity rents associated with spectrum use. For example, the promise of auction
proceeds may induce government agencies and legislators to support reallocating
additional spectrum for commercial use. If properly designed, an auction could also be
used to reallocate/relocate incumbents efficiently and thereby ease the transition
associated with spectrum reform.
Providing a practical mechanism for resolving transition issues is a key motivation
underlying the two-sided “Big Bang” auction proposal of Kwerel and Williams (2002).
Indeed, as Ikeda and Ye (2003) have suggested, auctions could be used to purchase
additional spectrum for unlicensed use.70 Such a plan could be incorporated into a “Big
Bang” auction. Thus, auctions can be used to increase the supply of commercial spectrum
and to re-direct existing spectrum to more efficient uses. When used in this way, support
for auctions and for allocating additional spectrum to unlicensed are fully consistent.
The use of auctions to extract scarcity rents is much more problematic – but this is a
problem both for licensed and unlicensed uses in that it artificially inflates the “cost” of
acquiring spectrum. If the goal of the auction is to capture scarcity rents, policy-makers
may seek to maximize auction proceeds which may induce them to restrict the supply of
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Lehr, W. “Economic Case for Dedicated Unlicensed”
spectrum or limit competition in wireless services.71 Capturing scarcity rents for the
public coffers is sometimes rationalized as being consistent with the public interest
because it provides a way for the general public to share in the benefits associated with
spectrum use, not just the investors and customers of wireless firms. While the political
attractiveness of such a policy is readily understandable, the implications are pernicious
for telecommunications policy, especially at a time when policy-makers are seeking to
promote investment in next generation communications infrastructure. Auction proceeds
that are removed from the sector represent a tax on wireless services and reduce the funds
available for investment.72
In summary, if auctions are used properly – solely as a mechanism to assign spectrum
efficiently and to facilitate the relocation of incumbents – they are consistent with
providing low-cost access to additional dedicated unlicensed spectrum. Of course, it is
not necessary to use auctions to provide additional dedicated spectrum for unlicensed use,
and as noted earlier, auctions are neither necessary nor sufficient to ensure that spectrum
is efficiently assigned.
D. Dedicated unlicensed is different from underlay or overlay rights
Providing easements for unlicensed use of exclusive licensed spectrum is another policy
option that is being widely discussed. Certainly, if such easements are granted it will
provide a valuable opportunity for unlicensed users to access additional spectrum. There
are two principle ways in which unlicensed easements may be granted: (1) as underlay
rights; or (2) as overlay rights.
An underlay easement would allow secondary unlicensed users to share licensed
spectrum as long as they remain below the noise floor established by the license. For
some technologies, like UWB that operate by spreading their signal over a wide range of
frequencies and thereby are able to transmit high data rate signals at very low power in
any particular frequency channel, an underlay easement is especially attractive.
Alternatively, overlay easements (sometimes called “interleave” rights) allow secondary
unlicensed use of spectrum during periods or in locales where the licensee is not using
the spectrum. Location-aware (GPS) and cognitive radio technologies could be used to
enable smart devices to modify their transmissions in order to dynamically share the
spectrum with the licensed users. For example, by adopting a “listen before talking”
protocol, an unlicensed user could detect if the spectrum is in use, and only transmit if it
finds that the frequency is free.73
Both of these easements may be justified as desirable refinements of the exclusive use
right that is implicit in a traditional license. With these easements, the exclusive use right
is narrowed so as to more closely address only those situations where the licensee’s use
of the spectrum is threatened by interference. In effect, these easements reduce the
likelihood that the granting of an exclusive use license will result in artificial spectrum
scarcity either by its mere existence or by the way that it is enforced by the licensee.
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While adoption of such easements would prove useful in supporting a wide range of
unlicensed operation, these are not an adequate substitute for dedicated unlicensed
spectrum. First, implementation of unlicensed easements is quite contentious and has
been widely opposed by incumbents. While there are many technical approaches to how
these might be implemented, there is no general agreement as to the best technical
solution.
With respect to underlay rights, the FCC is investigating defining an “interference
temperature” profile that would allow better account of how the need to protect
interference may differ as one moves throughout the license territory.74 The interference
temperature concept is interesting, but there are a number of important technical and
regulatory questions that need to be addressed. For example, how will the interference
temperature be modified over time as technologies or services change? Will different
temperature profiles be specified for each frequency license and will these differ by the
services being offered? If so, that may amount to on-going frequency-specific regulation
of the choice of technology and services and therefore mimic much of what has proven
unsatisfactory with traditional spectrum management. Even assuming that this proves to
be a viable mechanism for implementing underlay rights, that does not mean that
incumbents will support its adoption.
With respect to overlay rights, there are even more problems and more diversity of
opinion as to how to implement such rights and whether they are desirable. At one end of
the extreme are technologies that rely on real-time dynamic frequency allocation. At the
other end, there are modifications that would allow secondary use in rural areas where the
licensee does not currently have infrastructure. There are important questions as to how
overlay compliance would be enforced. Identifying and prosecuting infringing
intermittent transmitters is likely to be quite difficult. The difficulties of implementation
and enforcement will vary with the overlay/underlay strategy that is employed. In all
cases, however, the licensee will have a valid fear that destructive interference will be
more likely in their frequency band if the secondary use easement fails to be implemented
correctly.
In contrast, with dedicated unlicensed, licensees in adjacent bands have no more reason
to fear interference than if the adjacent spectrum were allocated under an exclusive use
license. Therefore, allocating addition spectrum for dedicated unlicensed use may be
easier in the face of opposition and may offer more “future proofing” with respect to
dynamic technology changes. Exclusive license holders who have valid concerns about
the threat easements pose for their current services and services they may wish to add in
the future may prefer supporting unlicensed use in dedicated spectrum, especially when
the spectrum comes from someone else’s piece of the pie.
Using easements to support unlicensed treats unlicensed as a secondary use.75 This tilts
the playing field towards licensed spectrum, thereby reducing the benefits from adopting
an explicit approach to promote regulatory diversity. By providing for both additional
dedicated licensed and unlicensed lower-frequency spectrum, the impact of regulation on
the future choice of technology and the industry structure is reduced. The market can
choose which spectrum model is more appropriate for supporting innovation and market
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Lehr, W. “Economic Case for Dedicated Unlicensed”
growth. It may turn out that dedicated unlicensed spectrum is most useful as a testbed for
experimenting with new services which find it necessary to migrate to licensed spectrum
if the benefits of an exclusive license prove compelling. Alternatively – as certainly
seems possible if not likely – we may find that the same vigor that has characterized
competition and innovation in the unlicensed 900MHz, 2.4 and 5GHz bands extends to
any new dedicated unlicensed spectrum.
VI.
Economic arguments in favor of unlicensed
In earlier sections, I explained why supporting dedicated unlicensed (1) is consistent with
increased liberalization of exclusive licensed spectrum and does not imply increased
government regulation of the unlicensed spectrum; (2) does not imply free spectrum,
although it does assume that spectrum use costs will be negligible;76 and (3) is consistent
with using auctions to assign spectrum, although does not require that auctions be used.
In addition, I have explained why additional dedicated spectrum above 3GHz or
secondary use easements via underlay or overlay rights do not offer an adequate
substitute for additional dedicated spectrum below 3GHz. In this section, I first
characterize the economic arguments in favor of using exclusive licenses for virtually all
lower-frequency spectrum, and then identify the flaws in these arguments. In the
following, I am assuming that flexible licensing and secondary markets have been
enabled. As noted earlier, if this is not the case, then the argument for allocating
additional spectrum to dedicated unlicensed is even stronger.
A. Economic basis for supporting exclusive licenses
There are three principle economic justifications for relying on exclusive licenses: (1)
spectrum scarcity; (2) investment incentives; and (3) interference management. The first
justification views spectrum as an economic good and focuses on the role of markets in
allocating that good. The second justification focuses on the need to provide users and
providers with appropriate incentives to invest in network equipment and services. The
third justification recognizes that even when spectrum is not “scarce,” it may be
necessary to coordinate user behavior in order to allow users to share spectrum without
adversely impacting or “interfering” with each other.
These three justifications are closely interrelated and may each be viewed (loosely) as
related to a slightly different notion of economic efficiency: “Spectrum scarcity”
addresses allocative efficiency, which ensures that resources are directed toward their
highest value uses; “Investment incentives” addresses dynamic efficiency, which ensures
that resources are used optimally over time; and “interference management” addresses
productive efficiency, which ensures that resources are not wasted (services are produced
at lowest resource cost).
Each of these justifications for the licensed model rests on a common set of assumptions
that are open to critique, and therefore, support consideration of an alternative
management regime based on unlicensed use. These include assuming that: (1) spectrum
is scarce; (2) markets offer the best mechanism for allocating scarce spectrum resources;
and licenses are necessary for (3) markets to operate efficiently; (4) provide investment
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Lehr, W. “Economic Case for Dedicated Unlicensed”
incentives; and (5) to manage interference. The following sub-sections explain why each
of these assumptions are questionable. This discussion rebuts the economic justifications
used to explain why a licensed regime is better than an unlicensed regime.
1. Scarcity may be a regulatory artifact
The impetus for spectrum reform came from service providers, equipment makers, and
customers wishing to offer or take advantage of new wireless services that are currently
hampered by regulatory restrictions that limit access to RF spectrum. Since 1995, billions
of dollars have been paid in auctions for licenses, providing tangible evidence of
industry’s willingness-to-pay for spectrum and providing an empirical basis for
estimating the opportunity cost for using spectrum. Estimates inferred on this basis can be
substantial. For example, one industry analyst used “$10 per month per subscriber” as a
ballpark estimate of the on-going cost of the spectrum used to support 2G mobile
services.77
While the auction data demonstrates that industry is willing to pay substantial amounts
for exclusive use licenses, it is unclear how much of this payment reflects artificial
scarcity due either to regulatory mismanagement (i.e., too much spectrum being tied up
under restrictive, inflexible use licenses that prevents it from being reallocated) or to
exclusive licenses (e.g., the desire to protect or exploit market power). Incumbents have
argued that granting them flexibility would allow spectrum to be redeployed, thereby
increasing supply and lowering spectrum costs. Additionally, proponents of auctions
argue that to the extent that a license may convey an opportunity to earn monopoly
profits, ex ante competition among would-be monopolists will extract any monopoly
rents via the auction proceeds. If this occurs, however, it means that the expected
business plan of the winner incorporates those anticipated monopoly profits.78 The
licensee has an incentive to maximize the value of its exclusive license, which includes
potentially restricting future access to the spectrum, even when such access could be
shared at zero cost.79
Certainly, if additional spectrum is made available by allocating new spectrum to
commercial uses or by spectrum reform that makes it easier to use existing spectrum
more intensively (e.g., increasing licensing flexibility and granting secondary use
easements) and more easily transferred to higher value uses (e.g., by promoting the
emergence of secondary markets and by allocating additional spectrum to dedicated
unlicensed), the opportunity cost for spectrum should decrease.80
Evidence of current spectrum use suggests that licensed spectrum is under-utilized. If one
drives around with a meter measuring the level of RF transmissions in the prime
spectrum below 3GHz, one finds under-used spectrum most of the time, in most locales,
in most of the frequency bands.81 While some frequencies are being used intensively in
some places (e.g., cell phone calls that are dropped during rush hour), there is usually lots
of unused spectrum in adjacent bands. This suggests that most of the observed “scarcity”
is a regulatory artifact.
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Furthermore, as already noted, many of the advances in wireless technology make it
possible to use spectrum much more intensively without causing destructive interference.
For example, one of the justifications for retaining spectrum for over-the-air television
broadcasting is to protect access to free television for households with old analog
televisions. Requiring customers to upgrade their televisions to take advantage of smartreceiver, digital technology would allow much more efficient utilization of the spectrum.
In Berlin, policymakers determined that it was much cheaper to simply subsidize the
conversion to digital receivers than to delay the conversion to digital television.82 As
explained further below, dedicated unlicensed spectrum may enhance incentives to adopt
spectrally efficient technology faster.
If spectrum is not scarce, then one of the significant justifications for supporting
exclusive licenses disappears. If there is no scarcity, then it is unnecessary to incur the
bureaucratic overhead and transaction costs associated with licenses in order to allocate
the resource more efficiently.
2. Coordination costs may be lower with unlicensed
Although spectrum reform and adoption of new wireless technologies can significantly
increase spectrum supply, demand may grow even faster. Even if there is ample spectrum
for most uses in most locales, localized congestion (with respect to time or location) is
likely to persist at least under some circumstances. Furthermore, the adoption of efficient
spectrum sharing technologies will take time and will not be uniform. For these reasons,
it is important to consider how best to allocate spectrum if it remains scarce.
The standard economist answer is to rely on markets to allocate scarce resources.
Although Coase (1959) made this point almost fifty years ago, regulators have been slow
to move towards increased reliance on market forces. While this may be the correct
solution for most scarce resources, and even for spectrum in many cases, it is worthwhile
considering the circumstances within which “market allocation” is not likely to offer the
best mechanism for allocating scarce spectrum.
For a market to be efficient, a number of assumptions have to apply. First, it has to be
possible to define the good that is to be allocated. Second, the market prices should be
efficient.83 As Benkler (2002) has explained, these assumptions may not apply in the case
of spectrum. If the goal is to rely on markets to address spectrum scarcity, then the
markets need to be local. That is, scarcity will arise in specific locations at specific times.
As the time scale becomes shorter (i.e., as one moves toward real-time markets) and the
geographic region smaller, the challenges of supporting an efficient market will become
greater. Under such circumstances, it may be simpler to opt for over-provisioning
coupled to an admissions control protocol rather than market-allocation to address
congestion.
Furthermore, even if a market price can be determined in a timely fashion, there is no
guarantee that it will be efficient. If there is either monopoly or monopsony power, prices
may deviate from optimal levels. As noted before, incumbents have an incentive to
protect and exploit their market power. By restricting the availability of spectrum, they
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Lehr, W. “Economic Case for Dedicated Unlicensed”
may be able to inflate prices to capture artificial scarcity rents. Even more perversely,
they may selectively restrict spectrum access to new technologies that are expected to
pose a competitive threat to their market power, thereby influencing not only end-user
prices but the direction of technical change and slowing the progress of competition.84
The history of AM and VHF opposition to FM and UHF and its adverse impact on the
development of these services, as described by Hazlett (2001), demonstrates that this is a
real concern. Alternatively, the licensee may choose to set a non-zero price to extract the
rents associated with any innovative uses that make use of the spectrum. This can reduce
incentives to invest in innovative technologies, as discussed further below.
Prices may also deviate from efficient levels if there are externalities that are not reflected
in the prices. These could be negative (e.g., interference) or positive (e.g., network
effects) that are not appropriable by the transacting parties and hence not included in the
prices. For example, in the absence of suitable underlay rights, a negative externality
would arise if a technology like UWB were foreclosed from using frequencies which are
priced only to reflect the value of the use rights of those services that operate within
licensed bands.85 Alternatively, a new technology or service may fail to emerge if prices
do not take account of the positive externalities associated with network effects.86 While
it may be possible to reform property rights so that these externalities are internalized, it
may be better to simply address these externalities via a non-market mechanism.87
Even if efficient prices can be set by the market, these do not always offer the best
mechanism for coordinating the allocation of resources. When Coase (1959) argued in
favor of using markets for allocating spectrum licenses, he was focusing on the thencurrent state of the wireless world and the alternative used by the FCC to allocate licenses
based on a bureaucratically-expensive administrative process that was vulnerable to
influence costs. This is not the modern wireless world considered here of flexible licenses
for a lot of spectrum.
In Coase (1937), his seminal paper on the theory of the firm, Coase identified
circumstances when markets are not likely to offer the best mechanism for allocating
scarce resources. If transaction costs are sufficiently high, it may be better to allocate
resources using a non-market mechanism. Transaction costs are higher when there are
search and information costs, bargaining costs, or policing and enforcement costs. If
scarcity is intermittent or localized, these costs may be high relative to the value of the
spectrum rights that are being exchanged. Matching spectrum buyers and sellers if the
market is decentralized may be expensive. Alternatively, supporting a centralized market
when the transactions need to be decentralized (because scarcity is very localized) may
entail substantial transaction costs. For example, consider a wireless device with only
very occasional needs to communicate with anyone, and when such needs arise, are
unlikely to involve the same parties or occur in similar locations.
For any level of transaction costs, the lower the marginal value of the spectrum, the more
likely that those transaction costs will preclude efficient allocation. With reduced
spectrum scarcity, the marginal value of spectrum will be lower. The value of the
spectrum being sold may be small if users’ willingness-to-pay to avoid “congestion” is
low. For example, if the communications are inherently low value or easily shifted in
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time, modulation, or frequency (so as to avoid interfering) than the “prices” may be so
low that coordination might be better achieved using a non-price coordination device that
relies solely on signaling instead of market transactions. There are lots of “rules of the
road”-type mechanisms that may achieve coordination much more effectively without
requiring the overhead of a payment mechanism of enforcement. If spectrum is not scarce
and transaction costs are relatively high then an unlicensed model (more like a commons)
may offer a superior mechanism for allocating spectrum, as even Faulhaber and Farber
(2002) concede.
Finally, if history is any guide, then the experience to date of “Quality of Service” pricing
in the Internet suggests that it may continue to be cheaper to over-provision capacity than
to implement a pricing mechanism to induce more efficient utilization at the margin.88
During the 1990s, significant academic and industry research and development went
towards developing incentive-compatible pricing mechanisms to allow more efficient
utilization of Internet capacity.89 The problem was that the traditional Internet was based
on a “best efforts” packet service protocol that results in increasing packet delays during
periods of congestion. For delay-sensitive services like voice telephony, this presents a
problem. Although numerous technologies have been implemented to support prioritized
pricing, most network operators simply opted for over-provisioning rather than incur the
added overhead associated with traffic metering and transaction processing. When
quality-of-service pricing has been introduced, it has been employed more as a means of
supporting pricing discrimination than in order to allocate scarce resources.
3. Exclusive licenses are not essential to support market allocation of spectrum
While the preceding discussion raised questions about the feasibility and efficiency of
using markets for allocating spectrum, these arguments are not conclusive. There may be
situations where market-based spectrum allocation may be efficient. However, the
market-based allocation does not have to be via real-time pricing, and even if it is, it does
not require exclusive licenses.
On the one hand, market forces could be employed in the selection of a sharing protocol
or etiquette to manage the unlicensed spectrum. This could be accomplished by
delegating the selection of the protocol to an independent standards development
organization. Exclusive licenses are not needed to ensure that market forces are reflected
in the operation of unlicensed spectrum.
On the other hand, exclusive licenses are not necessary to implement real-time pricing.
As Noam (1995, 1998) first pointed out, and Benkler (2002) re-enforces, exclusive
frequency-based licensing may make it more difficult to efficiently allocate spectrum
using prices. A licensing regime based on exclusive rights to use a narrow band of
frequencies in a specific geographic-area may prove too rigid and cumbersome. There is
no a priori reason to believe that the government could not administer a real-time market
(acting as the Walrasian auctioneer and clearing house) as efficiently as a private band
manager; or, alternatively, why such management could not be outsourced without
requiring a grant of private exclusive license rights.
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Lehr, W. “Economic Case for Dedicated Unlicensed”
Finally, because the allocation of additional spectrum to dedicated unlicensed is
anticipated to occur in conjunction with – not in full replacement of – increased
flexibility for licensed spectrum, market trading of exclusive licensing and dedicated
unlicensed could co-exist in different frequency bands below 3GHz. Indeed, the
availability of low cost unlicensed spectrum would provide a check on the ability of
exclusive licensees to extract artificial scarcity rents and would provide a haven for those
users and technologies for which market allocation of spectrum may not be efficient, as
noted above. As long as both regulatory models exist, relative pricing between the two
models will provide a market test and check on potential inefficiencies arising in one or
the other.90
4. Exclusive licenses are not necessary to promote investment incentives
Exclusive licenses are also justified to promote investment incentives. On the one hand,
exclusive licenses can provide incentives to use spectrum more efficiently. On the other
hand, exclusive licenses are argued to be necessary to promote investment in carrier
infrastructure. While these benefits may be true about exclusive licenses, they are neither
the only nor best way to promote efficient spectrum use and investment. Although
related, these two rationales involve distinct notions and are addressed in the following
sub-sections.
(1) Incentives to use spectrum efficiently
A common criticism of the unlicensed model is that it lacks incentives to use spectrum
efficiently, resulting in a “Tragedy of the Commons.” This arises when each user fails to
take into account the negative impact of their usage on the experience of others, resulting
in “congestion” or harmful interference.
By assigning a private property right to the spectrum, the owner becomes the residual
claimant to the spectrum, and thereby is presumed to have an incentive to manage the
spectrum efficiently. Of course, this assumes that the benefits of using the spectrum are
fully appropriable and the market allocation is efficient, which may fail to be the case for
several reasons. First, spectrum licenses are not granted in perpetuity and are constrained
in other ways that limit the owner’s ability to fully exploit the benefits of ownership. In
the absence of flexible licensing that allows a licensee to sublease the spectrum for
alternative uses, the marginal private cost of under-utilizing spectrum is zero and the
licensee may have a perverse incentive to promote or sustain inefficient spectrum
technologies.91 Second, even if licenses are flexible, there may be benefits from more
efficient spectrum utilization which are not appropriable by a private licensee. For
example, it the value or willingness to pay for reallocating the spectrum is less than the
transaction costs associated with collecting payment, the licensee may simply prefer to
avoid leasing.92 This could be the case because potential users are sparse and costs must
be incurred by the licensee in anticipation of potential buyers who may not materialize.
The existence of adequate dedicated unlicensed spectrum provides a test bed where such
demand can make itself known.
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Lehr, W. “Economic Case for Dedicated Unlicensed”
Furthermore, even when markets can adequately internalize the congestion externalities,
they do not offer the only mechanism capable of providing efficient incentives to use a
scarce resource efficiently. The “tragedy of the commons” arguments ignore the fact that
society has developed a number of management schemes that work quite well for
managing collectively-owned resources. Social norms and laws can discipline private
uses that lower total surplus. There is no a priori reason to presume that resource
ownership in common with common management is less efficient than private ownership
with private management.93
Additionally, as Benkler (2002) points out, incentives to invest in spectrum-efficient
technology may be improved in an unlicensed world. If users know that they may have to
contend with congestion, this can enhance their incentives to invest in technologies that
are robust to interference.94 While it is possible that these technologies could either
ameliorate interference (e.g., switch to an unused channel when interference is detected)
or make matters worse (e.g., boost power to drown out the competing signal), additional
“rules of the road” could be designed to constrain the types of interference responses
adopted to those that are collectively efficient.95
(2) Incentives to invest in wireless infrastructure
Some proponents of exclusive licenses argue that these are needed to provide carriers and
customers incentives to invest in radio equipment and services because such long-lived
assets are co-specialized with the frequencies that they use.
Because constructing a traditional carrier network requires large investments that may be
substantially sunk, a carrier’s incentive to invest is reduced by the threat of interference.
By granting some protection against future interference over the investment horizon,96 an
exclusive license lowers the ex ante costs of investing in infrastructure, and thereby may
promote investment.97
While this reason has provided a valid rationale for why service providers have claimed
they need exclusive licenses, and also why these licenses ought to be for long terms and
subject to easy renewal, the service provider model is not the only business model for
offering wide-area communication services. For example, consider the case already cited
of the device that only wants to communicate occasionally, and which may also be quite
inexpensive. In such a case, there is no large network investment that needs to be
protected. While such services may be provided over a service provider’s network, this
does not have to be the case.
Moreover, advances in wireless technology are rendering this traditional rationale less
relevant. First, wireless technology is increasing the frequency-agility of radio systems.
Even without the ideal of “cognitive radios,” software radio and modern system
engineering techniques are making network equipment more modular and more
upgradeable. The behavior of radios can be changed in many ways via remote software
upgrades or partial upgrades (board replacements) that do not require replacement of the
entire radio. Second, much of the investment in a carrier’s network that is long-lived
(towers, cell sites) remains useful even if all of the electronics need to be replaced; and
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Lehr, W. “Economic Case for Dedicated Unlicensed”
the electronics have much shorter useful lives (so do not justify granting a license in
perpetuity to protect against hold-up costs). Third, with the development of secondary
spectrum markets and flexible licensing, exit costs are reduced which further reduces the
need for protection from exclusive licenses. Taken together, these advances and changes
in the market make the spectrum used and the infrastructure that use it less cospecialized, thereby reducing the traditional basis underlying the need for exclusive
licenses to protect carrier investment incentives.
While advances in technology are making the need for exclusive licenses to protect
service provider investments in network infrastructure less necessary, these same
advances pose an increasing risk for new technologies and innovative services. That is,
the property right inherent in an exclusive license gives the licensee the right to charge a
non-zero price for spectrum even when it is not scarce. This could be used by the licensee
to expropriate the value of an innovative technology. For example, a licensee may have
rights to spectrum that is presently not perceived to be very valuable and, under a flexible
licensing regime, could be subleasing the spectrum for a nominal fee. Entrepreneurs with
innovative technologies who might otherwise benefit from access to the spectrum may be
deterred from investing by the threat of expropriation and hold-up. The increased
technical and market uncertainty associated with the rapid pace of innovation in wireless
and related technologies increases the potential social cost from such hold-up.
Entrepreneurs may be unable to raise the funds needed to purchase their own exclusive
license because of the need to demonstrate the technologies market viability first, and in
any case, the need to purchase such a license solely to protect against ex post
expropriation (moral hazard) with respect to artificial spectrum scarcity rents represents a
deadweight loss.
A similar problem arises when intellectual property rights are granted too broadly. For
example, this may occur when a patent is granted for a technology that subsequently
turns out to be a component in a much more valuable and larger technical system and the
patentee is able to capture monopoly rents associated with the larger system for use of the
patent. Alternatively, consider how the Internet domain naming rules were exploited by
firms and individuals to establish property rights to URLs that could subsequently be sold
to parties with a special value for those particular names. Firms seeking to protect their
trademarks and brand images have been induced to engage in costly litigation to acquire
URLs. While intellectual property rights are intended to provide an incentive to invest in
and then share new intellectual content, these rights can also deter investments in
complementary intellectual property and efficient access to intellectual property that
already exists (e.g., block “fair use”).
Furthermore, to the extent incumbents fear competition from new technologies, they may
seek to foreclose these technologies by denying them access to spectrum.98 While
efficient secondary markets for spectrum would reduce the risk of such foreclosure, it
would not eliminate this risk. While it is possible to make services and infrastructure
more frequency agile, individual technologies may be optimized for operation in
particular RF frequencies and the availability of abundant low-cost licensed spectrum in
another RF band will not perfectly discipline prices in the RF band used by a particular
technology. New technologies without an established user base (and therefore failing to
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Lehr, W. “Economic Case for Dedicated Unlicensed”
benefit from positive network externalities) and facing substantial market uncertainty
may be especially vulnerable.
5. Exclusive licenses not necessary to manage interference
Real spectrum “scarcity” arises when two uses of the same spectrum interfere with each
other. One way this can be managed is by assigning a property right that allows one user
to exclude the other. This property right can provide the basis of a market allocation of
spectrum. However, I have already explained why such a market mechanism may not
always be the most efficient way to allocate scarce spectrum, and why exclusive licenses
are not necessary and may be inferior to dedicated unlicensed even if a market allocation
process is used.
It is also sometimes argued (Hazlett, 1998) that the owner of an exclusive license would
be more likely to adopt the efficient sharing protocol than would a government manager
of dedicated unlicensed spectrum. There are several responses to this argument. First,
dedicated unlicensed that relies on a sharing protocol need not rely on an administrative
government process to select the protocol, as already explained. Second, a dedicated
unlicensed regime involves more than just an algorithm for allocating scarce spectrum.
While the sharing protocol is important, it is not the only feature that distinguishes
unlicensed from licensed.
Third, while an efficient market ought to induce adoption of an efficient sharing protocol,
there are a number of reasons which have already been cited for why a market based on
exclusive licenses may fail to be efficient. Allocating additional spectrum for dedicated
unlicensed and for exclusive licenses will provide a valuable test of which model adopts
the most efficient mechanisms for sharing. An analogous problem is associated with the
economics of industry standardization: sometimes de facto standardization offers the best
solution, whereas other times, the full process of a standards development organization is
needed to protect against capture by a limited set of interests. The winner of a de facto
race is not always the best technology, but may simply be the one which was introduced
first (e.g., if there are first-mover advantages) or is best suited to a market contest.
Finally, it is sometimes argued that exclusive licenses are needed to enable more efficient
enforcement of whatever interference management regime is adopted. The claim is that
by moving to a regime based on property rights, enforcement via the courts will replace
enforcement via a technical protocol or via an administrative body like the FCC and that
courts are inherently more efficient (Hazlett, 2001). The justification for this last claim
relies, in part, on the vulnerability of government administration to influence costs.
However, as Benkler (2002), points out, tort enforcement by the courts is not necessarily
better than enforcement by a different branch of government. Both are vulnerable to
influence costs and both may result in lengthy delays and inefficient outcomes. Property
rights for spectrum are inherently ambiguous, and should underlay and overlay easements
be adopted, will become even more so. Moreover, enforcement of spectrum rights is
likely to require quite specialized and arcane knowledge that might make it most
appropriate for enforcement by specialized “spectrum courts” which may offer only
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Lehr, W. “Economic Case for Dedicated Unlicensed”
limited (if any) improved protection from influence costs relative to the administrative
agency they seek to replace.
Furthermore, as already explained, dedicated unlicensed could be enforced via a market
mechanism (e.g, an industry standards body). Even voluntary certification of compliance
with the “industry specified congestion management protocol” could be effective. While
there may still be opportunistic defections, no enforcement mechanism is perfect and the
benefits of better enforcement must be weighed against its costs. If spectrum is relatively
plentiful (and hence low cost), voluntary compliance may be sustainable as an
individually rational equilibrium.
Finally, advances in technology such as cognitive radios will make it easier to
decentralize interference management.
B. Dedicated unlicensed below 3GHz preserves regulatory diversity
Allocating additional spectrum for dedicated unlicensed in the lower frequency bands
helps retain regulatory flexibility and diversity. Preserving such diversity only in higher
frequencies fails to recognize the important fact that different frequencies are not perfect
substitutes.
The regulatory diversity is valuable because no enforcement mechanism is perfect and
the uncertainty regarding the optimal regulatory approach is greatest in times of rapid
technical progress and industry transformation. Wireless services are helping to drive
industry convergence that is blurring the boundary between computing and
communications, content and conduit, broadcasting and telecommunications, and wired
and wireless networks.
Providing for the co-existence of multiple regulatory models supports multiple
experiments and provides an element of “future proofing.” With respect to the evolution
of broadband wireless services, we have already seen such benefits delivered by the
surprise success of WiFi services deployed in the ISM unlicensed band. Although this
spectrum is crowded and was not generally regarded as prime spectrum, it has given root
to a technology that has forced a rethinking of the whole way in which broadband
wireless services are delivered.
Finally, achieving spectrum reform will be difficult. Providing additional spectrum for
dedicated unlicensed services in the lower-frequency spectrum may enhance the
likelihood that the necessary reform will be accomplished in a timely fashion. I have
already identified a number of ways in which allocating dedicated unlicensed spectrum
might help to ameliorate opposition to spectrum reform.
C. Dedicated unlicensed supports innovation and investment
In addition to encouraging investment in smart radio technology, dedicated unlicensed is
also more compatible with decentralized, distributed models for industry evolution.
While the service provider model is likely to remain an important feature in the landscape
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Lehr, W. “Economic Case for Dedicated Unlicensed”
for wireless services, especially wide area communication services, it is not the only
model that should be allowed to exist.
The critical feature of dedicated unlicensed is that no private interest has a right to deny
access to potential users. Because users do not have to negotiate a service agreement
before accessing unlicensed spectrum, and because there is no one that has an exclusive
right to exclude them from using the spectrum, unlicensed spectrum lowers the costs for
decentralized, small-scale entry and viral industry growth. This can foster distributed
experimentation. Devices in isolated areas that are not intended to be part of large
integrated networks may find use of such spectrum especially attractive. However, as the
WiFi example demonstrates, technologies originally developed for one type of market
may evolve to serve other needs.
Although the distributed networks may remain independent, they may also be
interconnected. This could be via the public telecommunications network comprised of
interconnected service provider networks. When part of the larger communications
infrastructure, these distributed, decentralized wireless networks can support edge-based
innovation. Innovations can be adopted incrementally, without requiring changes to core
network components or without directly confronting the network effects that can make
legacy applications so difficult to replace. While network effects contribute to the value
of being part of a larger network, they can sometimes pose a barrier to innovation.
Even if unlicensed proves most useful as a test-bed for new technologies which elect to
migrate to licensed spectrum if they prove successful and congestion management
becomes more of an issue, this would provide a sufficient basis for supporting the
unlicensed model. Moreover, there are likely to be technologies that we have not yet
imagined that may find unlicensed offers a better operating environment. The growth of
wireless grids or ad hoc networks may be better supported in unlicensed spectrum.
Finally, unlicensed spectrum may be more likely to support the emergence of networks
that are based on an equipment-provider model. That is, networks that may be created
when end-user’s deploy equipment that can operate both as end-nodes and as relay or
transmission nodes. By linking series of such devices together in a “grid” or “mesh,” it is
possible to create a network capable of supporting communications over a wide area
without the intercession of a service provider. Although a service provider may be
involved, and interconnection with a service provider at some level is likely, such “ad
hoc” networks offer an alternative strategy for building up communications
infrastructure. If successful, these could offer additional sources of competition for
incumbents, further contributing to consumer choice. In response to the threat of such
competition or in recognition of the benefits offered by new technologies, service
providers may be induced to integrate these new services to enhance their service
offerings. Indeed, as with WiFi/3G, unlicensed model can (1) complement traditional
service provider business models (cellular); (2) assist in wireline/wireless convergence
(e.g., WiFi supported via DSL); or provide a platform for alternative entry platforms
(e.g., wireless local loop).
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Lehr, W. “Economic Case for Dedicated Unlicensed”
Indeed, mobile wireless providers seeking to provide broadband data services need access
to more lower frequency spectrum. For each of these carriers to acquire its own exclusive
spectrum licenses is likely to be very expensive and may result in more spectrum being
allocated to these carriers than is necessary to handle the traffic they are likely to actually
need to support their services; or each may remain spectrum-constrained. In the first case,
either customers will be forced to pay for the excess spectrum or carriers will fail to
recover their investments in spectrum licenses. In the latter case, the services offered will
be less than what might have been possible if carriers could pool their spectrum needs.
Unlicensed, shared spectrum could be integrated with exclusive licensed spectrum to
improve spectral efficiency, lower spectrum costs, without reducing quality-of-service.
V11.
Conclusions and Policy Recommendations
There is general agreement among industry analysts that the traditional models of
spectrum management are in need of reform. Most economists agree that the reform
should seek to increase the ability of market forces to shape how spectrum is allocated
and used. Traditional licenses that were encumbered with restrictions on the choice of
technology, the services offered, their coverage, and the transferability of access rights
have imposed a high opportunity cost for spectrum for many advanced communication
services, while precluding the deployment of under-utilized spectrum to higher-value
uses. This has increased industry costs, reduced incentives to innovate, and slowed the
deployment and adoption of new services.
One solution that has been proposed is to transition to a regime of tradable property rights
for spectrum based on exclusive use frequency licenses. An alternative approach for
managing spectrum would be to allocate a band or bands of frequencies for unlicensed
uses. There seems to be an emerging consensus among those who support increased
reliance on market forces that exclusive use licenses offer a superior mechanism for
spectrum management, especially for the valuable lower frequency spectrum below
3GHz. The spectrum in these bands that is available for commercial use (and much of it
is not and remains under government control) is heavily populated by licensed
incumbents. Support for using exclusive licenses for lower frequency spectrum is
justified, in part, via recourse to Coase’s (1959) argument that markets do a better of job
of allocating scarce resources than do central governments. Moreover, it is argued that
support for unlicensed uses can be adequately provided via underlay and overlay
easements to allow secondary usage of licensed spectrum.
While the transition to a flexible licensing regime and making provision for unlicensed
easements are important reform policies, there is also a need to allocate additional
spectrum for dedicated unlicensed use in the lower frequencies below 3GHz. An
allocation on the order of another 100 to 300MHz would leave plenty of spectrum for the
exclusive licensing. Making such a provision is desirable because unlicensed use supports
a fundamentally different model for how wireless services may be developed and
deployed. This offers a valuable contribution to the wireless ecosystem, as the success of
WiFi in recent years attests.
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Lehr, W. “Economic Case for Dedicated Unlicensed”
Opposition to dedicated unlicensed is often conflated with the view that unlicensed is
inconsistent with auctions, implies spectrum use should be “free,” or that supporting
unlicensed means opposing liberalization of licensed spectrum. These are
misconceptions. An allocation of additional unlicensed spectrum could be included as
part of a spectrum auction. Unlicensed use is not “free” but it does preclude a private
party using its license to extract rents for access to the spectrum. And, unlicensed
spectrum does not imply more regulation and is consistent with increased reliance on
market forces.
Additional spectrum for dedicated unlicensed use is important because secondary use
easements are neither a foregone conclusion nor an adequate substitute. Furthermore, an
allowance below 3GHz is important because spectrum at different frequencies is useful
for different things. Additional spectrum for dedicated unlicensed use above 3GHz will
be available, and in any case, the difference between a licensing and unlicensed regime
are less pronounced at higher frequencies.
Promoting regulatory diversity is consistent with supporting increased reliance on market
forces since no regime will be completely free of regulation and its incumbent distortions.
By providing for multiple models in the lower frequencies, the forces of market-fueled
innovation and competition are enhanced.
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Lehr, W. “Economic Case for Dedicated Unlicensed”
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Lehr, W. “Economic Case for Dedicated Unlicensed”
Endnotes
1
This research was conducted with support from the
MIT Research Program on Internet and Telecoms
Convergence (http://itc.mit.edu), as well as the
Communications Futures Program (http://cfp.mit.edu).
2
See FCC, Spectrum Policy Task Force Report (2002).
3
See Benkler (2002), Werbach (2003), Gilder (2003), or
Lessig (2001).
4
The choice of 3GHz as a cut-off is somewhat arbitrary.
It was chosen to include the MMDS spectrum at
2.5GHz as well as the ISM Unlicensed spectrum at
2.4GHz and to approximate the upper bound for nonline-of-sight transmission. The benefits of lowerfrequency spectrum are even greater at still lower
frequencies, say below 1GHz which is dominated by
broadcast television. I am using “lower” instead of
“low” frequency in this paper to refer to frequencies
below 3GHz to avoid confusing radio engineers who
refer to lower-frequency spectrum as anything below
300Khz. (Thanks to Timothy Shepard for pointing this
out.)
5
The physics of higher frequency transmissions is
fundamentally different than at lower frequencies.
Unlicensed at higher frequencies – while very desirable
and important – is not the same as unlicensed at lower
frequencies. Furthermore, there is less of a policy
imperative because there is ample spectrum available to
support expansion of allocations for both commercial
licensed and unlicensed use, and point-to-point
exclusive use licenses, which are more viable at higher
frequencies where signals are focused as pencil-beams,
pose less of a potential barrier to shared use.
6
Underlay easements allow low-power unlicensed use
to operate in licensed spectrum so long as it is below a
noise threshold specified for the license. Ultrawideband
(UWB) represents an example of an underlay
technology. Overlay easements allow opportunistic use
of licensed spectrum when that spectrum is not in use by
the licensee. Cognitive radios that could sense if the
spectrum is free could provide an example of an overlay
technology.
7
Real spectrum scarcity arises when alternative uses
cannot share the same spectrum without causing
destructive interference that reduces the quality of one
or both services. This is to be distinguished from
"artificial" scarcity which arises when alternative uses
that could share the spectrum are blocked because of
regulatory barriers, where the latter could include the
property right granted to a licensee to exclude
alternative uses. The scarcity is "artificial" if in the
absence of such a regulatory barrier it would be
- 38 -
technically and economically viable to share the
spectrum. This precludes characterizing scarcity as
"artificial" when it is technically possible to share the
spectrum but to do so would be uneconomic (i.e., the
total costs of coordination/interference management to
support sharing exceed the total benefits associated with
such sharing).
8
Real costs for society may arise associated with
relocating incumbent users and service providers whose
legacy operations are disrupted by adoption of a new
spectrum management regime.
How or whether
incumbents receive compensation for any such costs
incurred is in part a political decision, however failure
to address these costs is likely to induce incumbents to
oppose Pareto-improving reforms.
9
That is, reforms both in the form of enabling flexible
secondary market trading of licensed and via an
expanded allocation for dedicated unlicensed spectrum.
10
For example, we do not allocate access to our roads,
public schools, or emergency ambulance services solely
via market-based mechanisms for obvious and
important
reasons.
Moreover,
the
allocation
mechanisms used coexist with and complement access
to first-class airline travel, private schools, and private
healthcare services.
11
That is, customers may shift functionality from
network services to applications run on end-user
controlled boxed (e.g., client software that runs VoIP),
thereby threatening a service providers ability to collect
revenue for those services (i.e., commoditization of
transmission). On the other hand, the increased
functionality will also drive increased demand for core
services. At this stage, it is unclear which effect will
dominate – however, consumers are likely to benefit in
either case.
12
A significant share of spectrum is reserved for
government use and is managed by the National
Telecommunications Information Agency (NTIA). The
spectrum that is allocated for commercial and public use
is managed by the Federal Communications
Commission. The focus of this paper is on management
models for commercial and public use spectrum,
however, the author supports reallocating additional
spectrum from government use to the private sector.
Such a reallocation would benefit both providers and
users of commercial services, and displaced government
users who will benefit from the innovations in wireless
services that would be promoted.
13
Over time, the FCC has liberalized licensing rules for
different bands and services such that the rules that
apply differ by frequency. Historically, the FCC has
been pretty liberal in allowing commercial licenses to be
Lehr, W. “Economic Case for Dedicated Unlicensed”
transferred for existing uses (e.g., allowing licensees to
trade territories or to accommodate corporate
restructuring).
14
See for example the FCC’s Spectrum Policy Task
Force Report (2002). Similar discussions have been
occurring around the globe. For example, in the UK
(Cave, 2002), in the European Community (EC Green
Paper on Spectrum Policy, 1998), in the ITU (Jeacock,
2004), and elsewhere around the world (see
http://www.itu.int/osg/spu/ni/spectrum/index.html for
briefing presentations from around the world from a
workshop at the ITU in February 2004).
15
See FCC (2000).
16
The super-heterodyne transceiver circuit, which has
provided the basic architecture for radio design, was
invented by Edwin Armstrong in 1917.
17
Exclusive-use licensees share the spectrum among
multiple users (e.g., mobile operator supporting
numerous simultaneous calls or an over-the-air
broadcaster providing service to many homes in the
broadcast market). The “exclusivity” arises because of
the licensees right to determine who is allowed to share
the spectrum.
18
For example, the interference threshold associated
with broadcast television licenses is set to accommodate
the needs of those receivers that are furthest from the
broadcasting station’s tower (where the signal is
weakest) but which are still expected to be able to be
view the station. Receivers closer to the transmission
tower or with “smarter” signal processing capabilities
could tolerate higher levels of “interference.”
19
See Lehr, Gillett, and Merino (2003) for further
discussion of the implications of software radios.
20
See Spectrum Policy Task Force (2002a), Werbach
(2003), and Lehr, Sirbu, and Gillett (2004) for userfriendly discussions of some of the relevant
developments.
21
For example, David Reed (2003) argues that spectrum
capacity may increase as users are added to the system.
Also, see Grossglauer and Tse (2002).
22
See Carter, Lahjouji, and McNeil (2003) for a survey
of unlicensed uses and regulatory issues. While
unlicensed use of wireless spectrum in the 900MHz and
2.4GHz bands has thrived, unlicensed devices have had
much more limited success in certain other bands (e.g.,
see Ting, Bauer, and Wildman, 2003, regarding use of
the Citizen Radio and Unlicensed PCS bands).
23
WiFi, or 802.11b, is the wireless Ethernet LAN
standard. See Lehr & McKnight (2003) for further
discussion of WiFi.
24
These estimates are from an In-Stat/MDR Report
(see, Shim, Richard, “Report: Wi-Fi Gear Moving on
the Double,” CNET News.com, January 14, 2004.
- 39 -
Available
at:
http://news.com.com/2100-73515141002.html).
25
There are a continuously evolving class of related
standards that support “WiFi”-like communications
over longer distances, at higher bandwidths, in different
frequency bands, and with support for additional
applications (e.g., added security and network
management functionality, support for real-time
services,
etc.).
See
http://grouper.ieee.org/groups/802/11/main.html
for
information on these standards or Lehr & McKnight
(2003), which provide additional references.
26
See “Report Examines Hotspot Growth and
Profitability,” Broadband Wireless OnLine, June 30,
2003
(available
at:
http://www.shorecliffcommunications.com/magazine/ne
ws.asp?news=2081)
27
See Judge, Peter, “Wi-Fi to Overtake Broadband,”
TECHWORLD, July 22, 2003 (Available at:
http://www.techworld.com/news/index.cfm?fuseaction=
displaynews&NewsID=293).
28
WiFi networks may be open or closed. Many users do
not activate the security features of WiFi and leave their
networks open either intentionally or through benign
neglect. When the network is open, anyone with a WiFienabled communication device which is within range of
the base station can access the network. In addition,
some publicly-spirited individuals, community groups,
government organizations, and firms sponsor freeaccess
WiFi
hotspots.
For
example,
see
http://www.lights.com/freenet/ for a directory of
“freenets” around the world.
29
That is, WiFi can be integrated into a 3G network to
provide high-speed, hot-spot access that increases the
value of the lower-bandwidth but longer-range 3G
services. Alternatively, WiFi can provide a substitute
service for 3G. With the addition of Voice-over-IP and
further improvements in WiFi technology, the potential
competition between 3G and WiFi could intensify. See
Lehr & McKnight (2003) for further discussion.
30
For a perspective on the role of UWB in home
networking see Ultra Wideband FAQs at http://ewww.motorola.com/webapp/sps/site/overview.jsp?node
Id=02XPgQhHPR02204720. See FCC (2003c) for
recent FCC decision permitting low-power UWB use
and see http://www.uwb.org for information and links
regarding the activities of the UWB working group.
31
See Lehr, Sirbu, and Gillett (2004) and Barranca
(2004) for a discussion of how municipalities are using
wireless.
32
See Sandvig (2003) for a discussion of WiFi
cooperative deployments.
33
The need to accommodate legacy technology
increases as the pace of adoption of new technologies
Lehr, W. “Economic Case for Dedicated Unlicensed”
increases, allowing multiple generations of technology
to co-exist. Technologies like software radio can
accelerate adoption by lowering the costs of updating
systems (e.g., remote software upgrades replace
hardware replacement for base stations) and by reducing
the costs of managing heterogeneity (i.e., devices can
support multiple radios to facilitate interoperability).
34
Wireless grids or ad hoc networks provide an extreme
version of such networks. In a wireless grid, each enduser node is also a repeater. By cooperatively sharing
their capacity, such networks could support end-to-end
services without the coordination of a centralized
planner. See Lippman and Reed (2003); McKnight,
Lehr, and Howison (2003); or Gaynor, McKnight,
Hwang, and Freedman (2003) for further discussion of
the implications of these new networking trends.
35
For example, see Isenberg (1997) or Blumenthal and
Clark (2003).
36
It is worth noting that while the Task Force
recommends primarily relying in the licensing model, it
does not argue that this should be the only model in the
lower frequencies (which they refer to as frequencies
below 5GHz, see Kolodzy, 2002). The Task Force
advocacy of co-existence between licensed and
unlicensed below 5GHz is consistent with the
arguments made here.
37
The relationship between frequency and propagation
is complex and transmissions in each band offer
advantages and disadvantages. As frequency increases,
wavelength decreases, which impacts the way the RF
waves interact with obstacles along the transmission
path (air molecules, rain drops, trees, doorways, hills,
etc.).
38
This is due in part to market scale and learning
effects. As the market for and experience with operating
at higher frequencies grows, the cost disparity in the
associated electronics will decrease. One important
effect is that higher frequency antennas can be smaller.
39
That is, the RF spectrum extends from 3Khz to
300GHz. There is only 3GHz of lower-frequency
spectrum as defined here, as opposed to almost a
100GHz above (of currently usable spectrum). Thus, if
one is simply counting MHz, there is obviously more
potentially usable frequency above 3GHz than below
3GHz. However, this comparison is somewhat
misleading because, as is explained here, different
spectrum has different propagation properties and so
100MHz at 700MHz may allow you to do more or less
than at 10GHz, depending on what you want to do.
Moreover, the 3GHz upper threshold is somewhat
arbitrary but is intended to include the unlicensed
spectrum currently used by WiFi (2.4GHz) and the
MMDS (2.6GHz) spectrum that is under review for
reform. While the WiFi technology was originally
- 40 -
developed as a WLAN service at ranges of a few
hundred feet, its range can be extended to several miles
with directional antennas and certain other
modifications. Additionally, MMDS systems were
originally developed to provide a wireless local access
platform for service providers over MAN distances, and
improvements in MMDS have increased the ability of
technologies in this class to provide NLOS service. In
contrast, the challenges appear much greater associated
with supporting NLOS or long-range communications
using frequencies above 3GHz (e.g., in the 5GHz
unlicensed spectrum where 802.11a WLANs operate).
40
This includes broadcast entertainment (radio and
television), mobile telephone services, and narrow-band
control services.
41
That is, when it was difficult/expensive to digitize
higher-frequency (high-sampling rate) signals, services
were deployed using lower-frequency channels.
42
With a focused beam between, say, two microwave
towers, it is easier to ensure that the higher-power
radiation only goes where it is supposed to go, thereby
reducing safety and interference concerns about highpower operation.
43
The savings are based on comparing the cost of
operating a broadband wireless local access system
using OFDM modulation and indoor CPE (desk-top
antennas) at 700 MHz instead of 2.6GHz (see
Wanichkorn and Sirbu, 2002, page 25). Analogous
effects were confirmed by Chris Knudsen, Vulcan
Partners, in private correspondence, and by Mark
McHenry, Shared Spectrum Company (see McHenry,
2001).
44
Installation becomes feasible in expanded set of
locations (e.g., where LOS is not available such as
inside the home) and does not require costly antenna
placement (i.e., customer self-install can replace
service-provider on-site installation).
45
The physics of RF transmission do not imply that it
takes more power to transmit a bit of information at a
higher frequency. If the aperture of the receiving
antenna is kept constant, then the power required to
transmit does not depend on the frequency. Since the
size of the antenna can shrink as the frequency
increases, it is possible to design fancier antennas using
the same form factor for a lower frequency antenna.
What this means is that with more advanced technology,
it should be possible to allow higher frequency
operation for small hand-held devices without requiring
more power per bit transmitted. But, this is likely to
incur higher antenna costs, at least in the near term.
However, if the data rate goes up, which is often one of
the advantages of operating at a higher frequency, then
more power will be used but this is a function of the
Lehr, W. “Economic Case for Dedicated Unlicensed”
data rate supported rather than the frequency at which it
is supported.
46
This is the approach that has been adopted by the
FCC for spectrum in the millimeter bands above 70GHz
(see FCC WT 02-146 Millimeter Band Proceeding).
47
Beam forming antennas can facilitate much more
efficient use of spectrum in all frequency bands (spatial
reuse).
48
That is, the exclusive license does not allow arbitrary
exclusion of uses that would not otherwise be
interfering but does provide recourse to protect the
licensees service from an interfering use. Analogously,
the certification rules included in Part 15 are intended in
part to ensure that the power limit restrictions that are
intended to limit interference conflicts in unlicensed
spectrum are respected.
49
See, for example, Comments of 37 Concerned
Economists (2001), Kwerel & Williams (2002), or
Faulhaber and Farber (2002).
50
However, because such reforms remain contentious,
there are "transition" benefits to allocating additional
dedicated unlicensed spectrum now. While it is hoped
that liberalization of licenses will progress rapidly, the
final outcome is far from assured. A commitment to
additional unlicensed at this stage could ensure that
additional spectrum for this model of development is
guaranteed and would help clarify the debate for how
licenses ought to be liberalized. This would contribute
to reducing regulatory uncertainty and would likely
reduce the contentiousness of the debate over licensed
spectrum. (That is, by muting arguments that unlicensed
and licensed spectrum are in contention.)
51
The dedicated spectrum could be provided by
releasing additional government spectrum for
commercial use.
52
This paper does not attempt to make a specific
proposal as to which frequencies or how much
frequency below 3GHz ought to be allocated for
dedicated unlicensed use, or even whether it is better to
allocate the frequency in a contiguous block or in
multiple blocks with different management schemes.
Each specific proposal would need to be evaluated with
respect to how the transition would be managed (How
to address the needs of incumbents and other
stakeholders?) and what institutional framework should
be used to support congestion management in the
unlicensed framework (Protocol or market? Who
decides?). The 100-300MHz estimate is used to suggest
the magnitude of the allocation that ought to be
considered (i.e., to exclude trivial allocations), that are
achievable (i.e., there is substantially more than
300MHz of spectrum that is currently under-utilized
below 3GHz, much of it currently restricted to
government use), and that would provide enough
- 41 -
bandwidth to allow for innovative services and
substantial growth in users. Current and near-future
modulation techniques can code one to a few bits per
hertz. While these may be increased, there are
theoretical limits to the information carrying capacity of
frequency that must be respected. Allocating between
100 to 300MHz would allow peak data rates in the
100Mbps to 1Gpbs range, thereby ensuring that the
wireless services were not artificially constrained to
slower speeds because of regulatory limits.
53
See, for example, Bazelon (2002).
54
That is, there are also costs associated with
enforcement of property rights via the courts. Attempts
to limit the size of damage awards in civil litigation and
modifications to evidence rules reflect efforts to
ameliorate the deadweight costs associated with
inefficient enforcement via the courts, and are
analogous to similar efforts to reform government
inefficiency (e.g. moving from rate-of-return to pricecap utility regulation and public hearings to reduce
regulatory capture).
55
This is analogous to the problem of management
compensation and the correct balance between salary,
bonuses, and equity (ownership) participation in the
firm. Ownership may help but is not necessary nor
sufficient to induce managers to make decisions which
are optimal for investors.
56
There are several proposals for how these might be
implemented, including adopting a “bill of rights” for
unlicensed wireless devices (see Konston, 2002).
Alternatively, a technical protocol could be used that
would address interference management issues (see
Peha, 2000 for an example of a technical solution for
sharing).
57
That is, the efficient operation of markets typically
presumes the existence of courts to enforce property
rights. Such a “spectrum court,” would likely be quite
similar to an administrative court because it would
require a good deal of specialized knowledge for
efficient and low-cost enforcement. This specialized
knowledge which helps reduce enforcement costs also
makes the court potentially more vulnerable to the same
sorts of influence costs that are argued to hamper the
efficient working of administrative agencies and render
them vulnerable to capture. While there may be benefits
to moving from direct regulatory oversight to
governance via the courts, these benefits should not be
overstated – and in any case – are not more easily
realized under a licensing regime.
58
However, because there are costs associated with
adopting technologies that make it feasible to use higher
frequency spectrum (expanding the range of useable
RF) and to facilitate more intensive use of existing
usable and allocated spectrum (e.g., spectrum sharing),
Lehr, W. “Economic Case for Dedicated Unlicensed”
these could be thought of as investments in increasing
spectrum “capacity.” However, these costs are not
directly associated with using the spectrum but rather
with how it is used. A good spectrum management
regime will provide appropriate incentives for adopting
such technologies.
59
Interference management involves both the allocation
of scarce spectrum when multiple uses cannot share the
spectrum, and coordinating usage so that when sharing
can occur, it does so without inflicting damaging
interference on each other. There are many ways to
manage such coordination. For example, it could be on
the basis of a “first come, first serve” where other uses
wait until the channel is clear; or it could be based on
changing the modulation scheme or operating
frequency; or on some other approach. Whatever
approach is adopted, it may impose some costs on one
or more of the users (e.g., late comers are delayed or
everyone tolerates a noisier environment), however the
expectation is that costs associated with operating an
efficient shared use coordination mechanism will be
small relative to the value of the traffic coordinated.
While there may be some adoption costs (e.g., higher
cost for software or equipment to implement the sharing
mechanism), any recurring costs per user will be
negligible.
60
A similar debate occurred over whether Internet
access is “free.” Traditionally, the heaviest users were
university researchers and corporate employees. Endusers did not directly pay for using the Internet and so
perceived that there were “no usage fees.” However, the
costs of supporting the infrastructure were borne by the
universities and corporate employers who paid flat
monthly fees based on the capacity of their connections
to the Internet. These capacity charges were correlated
with usage (larger pipes for more traffic) and were
sometimes subsidized (government funding for the
Internet) (see McKnight and Bailey (1998).
61
Of course, with flat rate pricing for blocks of calls, the
monthly rate stays the same as long as the caller does
not exceed their allowance. Customers who expect to
make more calls, select a higher price bundle.
62
The public benefited from the use of the services that
could be lower priced because they did not have to
recover the cost of acquiring spectrum. For example, the
first mobile license was given to the incumbent
telephone carriers and the second was awarded via
lottery. The reasons why it is undesirable to use auctions
to extract scarcity rents for using spectrum are discussed
further below.
63
There is no material difference in charging for
spectrum use of “dedicated unlicensed” via a license fee
for the intellectual property associated with a protocol
that is approved to operate in the spectrum and via
- 42 -
charges for a service that is only available via “licensed
spectrum.”
64
See Hazlett (2001) for a discussion of the many
examples where incumbents have resisted spectrum
reform that would have alleviated regulatory-induced
scarcity by allocating additional spectrum for potential
competitors.
65
That is, unlicensed use does not mean use without any
rules. The unlicensed spectrum may be managed by a
protocol that provides a technical determination of how
spectrum will be allocated during periods of congestion.
66
Ting, Bauer, and Wildman (2003) cite the costs of
clearing unlicensed PCS spectrum (U-PCS) that were
collected in device fees for qualifying equipment
seeking to use the asynchronous allocation as a potential
explanation for why this spectrum remains underutilized.
67
That is, if bidders are participating in a sequential
auction, the truth-revelation properties may be different.
Bids may be reduced to reflect the fear that future
government policies will seek to capture some of the
profits anticipated by bidders.
68
See Crampton (2002), McMillan (1994), or Rosston
and Owen (2002) for examples of economist support for
spectrum auctions. For a contrary view, see Noam
(1995) or Melody (2001). Theoretically, a bidder should
not bid more for the spectrum than what the spectrum is
worth to the bidder after accounting for the expected
costs of constructing the network that will use the
spectrum and the other costs of operating the business.
Once the spectrum is acquired, it is a sunk cost and as
long as capital markets are efficient, the bidder should
still have the same incentive and opportunity to deploy
its network. Unfortunately, capital markets are unlikely
to be efficient as the capital shortages faced by telecom
firms during the recent downturn in the sector
demonstrated. Additionally, expectations may be
incorrect and the winner’s curse may apply.
69
That is, in principle, an auction and a lottery followed
by secondary market trading will both assign spectrum
to its highest value use. In practice, this need not be the
case since neither the initial auction nor the subsequent
trading may be efficient for reasons discussed further
below.
70
Kwerel and Williams (2002) recommend that the
government be required to bid for spectrum that might
be set aside for dedicated unlicensed use.
71
For example, restrictive licensing rules can limit the
extent to which services operating in different
frequencies can compete with one another.
72
See Rothkopf and Bazelon (2003), Melody (2001),
and Noam (1998) for critiques of using auctions to
extract surplus.
Lehr, W. “Economic Case for Dedicated Unlicensed”
73
See Peha (2003) for a description of how such a
system might operate.
74
See FCC Interference NPRM ET03-237 (2003).
75
Primary use is consistent with government preemption under special circumstances. The need to have
adequate spectrum available in the case of an
emergency or for national security is often cited as a
reason for why additional government spectrum should
not be released for commercial use. One solution to this
is to provide for government-preemption or interruption
during such periods. If necessary, such pre-emptible
service could be provided for spectrum allocated via
exclusive licenses or dedicated unlicensed and so need
not provide a basis for preferring an exclusive licensing
regime.
76
There should not be usage charges that require a
service provider agreement. Therefore, if there are costs
these should be capitalized in the price of the radio
equipment and, in any case, are expected to be minimal
per end-user.
77
This rough estimate was provided by Carl Panisik,
Texas Instruments, in the context of pointing out that
spectrum costs would need to be much lower in order to
make the high data rate services anticipated by 3G/4G
services viable. To offer higher data rates, carrier’s
either need more spectrum, likely incurring higher
auction fees, or by using the spectrum they have more
intensively, which means more (smaller) cell cites and
higher infrastructure costs. (Mr. Panasik offered this
estimate during his talk at a workshop on spectrum
reform sponsored by the National Telecommunications
Information Administration (NTIA) on December 9,
2003. While quite imprecise, it was interesting to note
that no one in the room of academics, government, and
industry experts questioned the relative magnitude of
this estimate.)
78
Theoretically, it is possible to use the auction
proceeds to offset ex post monopoly pricing to the
extent that is desired (see Loeb and Magat, 1979).
79
One may ask question whether a license-induced
monopoly is a bad thing. There are two circumstances
when economics suggests it might not be: (1) when the
services to be provided via the spectrum are a natural
monopoly (i.e., costs are lowest when the market is
supplied by a single provider); or (2) when the
monopoly profits may be viewed dynamically as
Schumpeterian returns to risky investments in an earlier
period. In light of the trends in wireless services and
competition elsewhere in telecommunications services,
spectrum licensing is unlikely to be justified via
recourse to a “natural monopoly” argument. The second
argument relates to the potential need for licenses to
provide efficient investment incentives, which is
addressed further below.
- 43 -
80
The equilibrium price will depend on both supply and
demand conditions. In any case, expanding supply will
mean prices will be lower for whatever level of demand
prevails.
81
See Johnston and Snider (2003).
82
See Landler (2003).
83
What constitutes efficient “pricing” depends on the
context of the transaction. Pricing is inefficient if it
precludes concluding buyer/seller transactions that
would otherwise be efficient (e.g., there are buyers with
a willingness-to-pay that exceeds the cost of supply). In
a competitive market, efficient pricing should reflect
marginal costs; in a bilateral trade, any price between
the buyer’s willingness-to-pay and the seller’s cost is
potentially efficient. Prices are also inefficient if excess
resources are expended in acquiring a price. In a
competitive market, this may arise because it takes too
long to settle on an equilibrium (market-clearing) price;
in a bilateral trade, because there is too much
bargaining.
84
Because new technologies will experience network
effects, scale and scope economies, and learning effects,
it may be possible to foreclose emergence of a
competing technology by denying it access to spectrum
at affordable rates early in its life-cycle.
85
That is, UWB would have to purchase rights to
operate in the broad range of frequencies over which it
spreads its signal. Purchasing such rights may be too
expensive, precluding UWB participating in the market.
The use of the spectrum by the carriers with ownership
of the excludable licenses imposes a negative
externality on the UWB technology that is not reflected
in the prices for the excludable licenses.
86
That is, when there are network effects, early adopters
convey a subsidy on subsequent adopters because the
value to every subscriber is greater when the network is
larger. Such network effects can provide the basis for
penetration pricing (i.e., early adopters pay lower prices,
which increase as the size of the network grows, see
Katz and Shapiro, 1986). These may arise because the
market needs to “learn” about the benefits of the new
technology.
87
For example, while it is possible to imagine using
prices to allocate ambulances to emergency calls, we
quite correctly do not use such an approach. While
markets are used to allocate many scarce resources in
our society, they are also not used to allocate many
others such as access to roads, public education, and
emergency car. Or, they are used as complements to
non-market allocation schemes as in the case of firstclass air travel, private education, and private
healthcare. The existence of a market allocation
mechanism neither precludes co-existence with nor is
Lehr, W. “Economic Case for Dedicated Unlicensed”
superior (necessarily) to non-market allocation of scarce
resources.
88
In the context of spectrum pricing, “overprovisioning” amounts to adopting technologies to
expand the usability of available spectrum, which
includes technologies that allow operation in
increasingly noisy environments.
89
See McKnight and Bailey (1998) for a summary of
some of this research. See Odlyzko (1998) for argument
that over-provisioning is less expensive than charging
for quality-of-service.
90
The price for “unlicensed” use may be observed in
users willing to tolerate high levels of congestion as
preferable to paying still higher prices for licensed
access.
91
For example, if the licensee is not able to benefit from
sharing the spectrum, the licensee may seek to misuse
the spectrum by utilizing inefficient technology in order
to make it more costly for policymakers to take the
spectrum away. For example, consider how television
broadcasters benefit from the slow adoption of
television sets capable of receiving digital over-the-air
television. The slow pace of consumer adoption has
provided for justifying their claim to delay returning
under-utilized television spectrum for reallocation for
other uses.
92
Spectrum that is under-utilized but could be used
without causing interference has no intrinsic value.
Therefore, leaving this spectrum fallow solely because
the licensee cannot recover the transaction costs of
capturing a positive payment for the spectrum is
inefficient. This is analogous to the landowner who is
not adverse to limited public access to their private land,
but who nevertheless posts “no trespassing” signs that
preclude entry by all. Although the landowner may
choose never to prosecute trespassers, potential hikers
may be deterred by the signs even when the total social
benefit would be higher if the hikers were not deterred.
93
A discussion of commons vs. private property
management is beyond the scope of this paper. See
Ostrom (1990), Benkler (1997), or Lessig (2001).
94
The adoption of interference-robust technology may
be modeled as a coordination game because while it
may be costly to adopt such technology, its adoption
may increase spectrum capacity for all. This need not be
a Prisoners’ Dilemma because it need not be the case
that private deviation is always rational. However, even
if one models this as a Prisoners’ Dilemma, it is
possible to adopt protocols that enforce cooperation.
The use of reputation-based enforcement mechanisms is
in use by software applications such as the Peer-to-Peer
file sharing software called BitTorrent (see McKnight,
Lehr, and Howison, 2003).
95
See Konston (2002).
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96
Since nothing in life is certain or forever, the
protection cannot eliminate risk and does not need to.
Undertaking risky investments is a normal part of
business.
97
The license protects against ex post behavior that
would threaten the ex ante expectation that the original
investment will be recovered. This is analogous to the
justification for granting intellectual property rights to
provide incentives to invest in creating content.
98
Denying access is not necessary. Merely increasing
the cost of spectrum access to entrants or new
technologies may be sufficient to block their entry in the
presence of uncertainty, network effects, or scale
economies.
99
In addition to the references cited here, helpful
information was provided by David Reed, Tim
Shephard, David Clark, Marvin Sirbu, Jim Snider,
Coleman Bazelon, Sharon Gillett, and Andrew
Lippman, although they bear no responsibility for how I
may have misunderstood them.